By KIMBERLY LANKFORD
Q: Our son is graduating from college, and we'd like to open a Roth IRA for him as a graduation gift. He'll be starting a job in the fall but doesn't work now. Can we contribute to an IRA for him even though he isn't earning money yet?
A: What a great graduation present! Contributing to a Roth IRA now can give your son a huge head start on building a tax-free stash of money for retirement. If he's no longer a minor (generally age 18 for IRAs; ask the IRA administrator about the rules in your state), he'll need to open the Roth IRA himself. But you can give him the money to contribute to the account.
Your son must earn some income from a job during 2013 in order to qualify to make Roth contributions. But he can contribute the money now, even if he doesn't start working until the fall; he just needs to earn at least as much as the contribution amount -- with a $5,500 maximum in 2013 -- by the end of the year (investment income and allowances don't count).
If he earns $3,000 for the year, for example, then he can contribute up to $3,000 to the account. If he doesn't end up getting a job by the end of the year -- or if he earns less than the contribution -- he has until October 15, 2014, to withdraw the contribution and earnings on it from the account without having to pay the 6 percent penalty for excess contributions (but he will have to pay taxes on the earnings he withdraws). For more information, see the "excess contributions" section in IRS Publication 590, Individual Retirement Arrangements.
Contributing to a Roth IRA can also be a great gift for high school graduation. Kids of any age can contribute to a Roth IRA, as long as they've earned some income from a job during the year. A few brokerage firms and mutual fund companies don't let minors open IRAs, but several firms make it easy to open an account and have low fees and investment minimums. TD Ameritrade, for example, has no minimums or annual fees for its IRAs, and you can invest in anything that is available to its brokerage customers. The IRA must be in the minor's name as well as the custodian's name, and it must use the minor's tax ID number. Charles Schwab allows minors to open a custodial Roth IRA with $100; it charges no annual or maintenance fees.