One point that the majority of taxpayers agree upon is that retirement planning and education financing are their two most important financial-planning items. Often people fund their retirement planning and education financing quite independently of each other. Retirement plans are normally contributed to on a regular basis, whereas the financing of an education account/s for our child/ren is normally put on the list of things that you will get around to at a later date. The ongoing rise of higher education costs is leading parents and guardians to put at least a portion of the costs to one side so that they have at least some of the educational costs covered. There are a number of ways to go about retirement planning and education financing which are as follows:
Roth and Traditional IRA for Minors
For children that are earning an income from odd jobs such as babysitting or paper rounds they can use this income to fund a Roth or Traditional IRA. This will provide them with a head start on their retirement savings but also makes them aware of retirement planning and education financing from a very early age, encouraging them to start savings as early as possible.
There are many considerations that will apply to the child’s IRA and these are as follows:
Contribution Limits and Eligibility Requirements
The contribution limits and eligibility requirements are the same for adults and minors.
Due to the state laws prohibiting minors from entering into contracts, it means that they cannot establish an IRA. Therefore their parent or legal guardian is required to sign an adoption agreement on the behalf of the minor. The IRA must clearly show the child’s name clearly as well as the adults and the account will be transferred to the name of the child solely when they reach the age of majority.
Apart from amounts where no deduction was allowed or taken, IRA distributions are considered to be ordinary income.
The investment options for Roth and Traditional IRAs vary in accordance with the financial institution where the account is held. It is vital that you do thorough research with regards to retirement planning and education financingto ensure that anyinvestments you choose are compatible with your financial profile.
Education Savings Account
The Education Savings Account (ESA) is normally undertaken to provide the finance for the education of a named person. Qualified education expenses are represented by certain elementary and secondary education expenses and expenses for special-needs students. Eligible expenses include student-activity fees course-related books, supplies, equipment and some boarding fees.
The contributions made to the ESA are not deductible, although the earnings are tax free provided that the distributions are used to cover qualified expenses.
The yearly contribution for the ESA is $2,000 per designated beneficiary whether they are multiple people paying into the account and even if the beneficiary has more than one ESA in their name. This is why it is very important that anyone making a payment to the ESA account consults other individuals that may wish to contribute to ensure that they do not go over the $2,000 limit.
Who Can Contribute to an ESA?
Anyone who meets with the income specification can contribute to the account of a beneficiary. In order to contribute the person does not have to have an income, however if their income exceeds certain limits they will not be able to contribute to the ESA.
Portability among Family Members
If the ESA is not used by the individual that it is original bequeathed to the assets can be assigned to another family member who is under the age of 30 years. Those designated as family members are as follows:
- Son or daughter or their children
- Step children
- Siblings and step siblings
- Parents and step-parents
- Sibling’s children
- Brother or sister of parents
- All in laws
- The spouse any of the above
- First cousins
Apart from a special-needs beneficiary, contributions cannot be made after the beneficiary’s 18th birthday and the assets must be used within 30 days after their 30th birthday.
The Investment options for an ESA are similar to those of Traditional and Roth IRAs.
When you are looking for retirement planning and education financing it is vitally important that you compare the many features and benefits each plan offers and then you will be in the best position to reach your financial goals for your child’s education. There are still student loans and tax credits available that can be claimed for educational expenses. When you look into any options for retirement planning and education financingit is important to remember that you may be required to meet the eligibility requirements.