How to Start Funding an IRA for Your Kid

Dear Dr. Don, 

My 19-year-old daughter recently graduated from high school. I want to fund an individual retirement account for her so she can begin saving for her future. What is the best way to open the IRA? Can she make deposits herself once annually, or must they be every month? My goal is to help teach her the value of investing early for long-term growth. Should the account be in both of our names?

Thank you, 

-Karen Compounding

Dear Karen, 

Tax-advantaged retirement accounts may be held in only one person's name. If your daughter is legally considered a minor in your home state, then it may be necessary for you to be named as custodian on the account. Even so, the money is held in her name and is under her control as she legally becomes an adult. In most states, at age 19 she would be of legal age and your name would not be on the account. The individual retirement account provider will be able to say whether you need to be named on the account as custodian.

Your daughter must have taxable compensation in order to qualify as a contributor to a traditional or Roth IRA. If that is the case, you can gift her money to contribute up to the amount of her earned income or the annual contribution limit, whichever is less. As long as she doesn't go over the contribution allowed, it doesn't matter whether it trickles in over the tax year or the account is funded with a lump sum.

If your daughter is college-bound, your decision to fund her retirement account won't influence this year's financial aid package. But it might affect her eligibility for financial aid in later years in college.

Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Ask the adviser

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "Financing a home," "Saving and Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.

Copyright 2013, Bankrate Inc.