paying children: RothIRA or 529?

Question

I'm 40 and plan to pay my 2 kids (approx $1200/year) for helping in the family business. My financial advisor suggested putting their money into a RothIRA. Advantage: RothIRA's can be used for college or saved for retirement if they don't attend college. But the salesperson thinks that's nuts, if the kids do attend college the 529s are much better. Well, I do expect they will attend college; which alternative is better?

Now, if I choose the RothIRA, I would open the accounts in their names. But 529's don't seem to work that way; parents or grandparents open 529s in their own names for the kids' benefit, right? So how does that count as paying the children (in terms of taxes)?

Forgot to mention: the kids are now 7 and 4.

Answer 1

Lots of good advice, but if the children are only 7 & 4 you have to ask yourself if there is a valid deduction for your business. You would have to be able to convince the taxman that they did actually do productive work.

Answer 2

To clarify the previous answer, Roth IRA's are NOT tax deductible. Rather, upon withdraw, they are tax free. However, if the students go to withdraw money before reaching 59.5, any INTEREST received will be fully taxable as income. The pricinpal amounts put in will be tax free.

In the case of a 529, the whole amount is tax free if it is used for education. Finally, the ability to contribute to a 529 without penalties is very dependant on personal income, similar to the Roth.

If I had the choice, I would look at the age of the children. The younger they are, the better it is for the 529. The older, I would lean more towards the Roth, since the interest will be a small taxable amount in later years. This way, if they don't go to college, atleast they have money already set up in a retirement account.

Good luck!

Answer 3

You don't say how old the kids are.
The Roth idea is a hedge against one or both not going on to a post secondary education. The Roth allows a distribution of the amount invested without penalty which can be used for college. If you take any earnings or growth of investment out of the account it will be subject to income tax and penalty for a withdrawal before age 59 and one/half.
The 529 account is opened as an account for the benefit of with you as custodian. You would need a seperate account for each child. The 529 allows for distributions to pay for post secondary education and any withdrawal for this purpose is not subject to tax on the original investment nor on the income or growth.
The 529 can be used for post secondary education not just for college. Trade schools would be allowed etc.
From your perspective I think you worry about your obligations and retirement first. You need to save for your retirement and you need to either fund for kids college or a way to pay for kids college.
If you do the 529 you might be closing off college loans or education aid. The Roth would not do this. Some states allow a subtraction on your state income tax return for 529 contributions, Roth accounts don't qualify.
I don't know which is the best for you but I think I have given you enough parameters to discuss this with you financial advisor and let him advise on which way might be best. I don't think the salesperson is an unbiased advisor when it comes to making this decision.

Answer 4

The 529s will not be deductible on your 1040 like paying them wages - they just give you tax shelter on the 529 earnings. Aside from that the big difference is probably control of the money. With a Roth they will control it forever and can use it how and when they want to. With a 529 it must be used for college. Here is a link for 529 plans. It does not include your Roth idea - this may still work if you are hot for the 1040 deductions.

http://finance.yahoo.com/retirement/saving_for_college/article/101865/Multiple_Choice_in_College_Savings

Answer 5

The RothIRA is a great idea for young children such as yours but for some reason the lending places that sell them seem to discourage this. I have suspicions that it has something to do with commission. At the risk of offending your or your children, one never knows how they will behave in their college years and the Roth places a number of restrictions that will provide more assurance that the money will be used for a positive purpose.

Answer 6

If reminiscence serves, than definite. A 529 has the skill to alter the beneficiary on the account, as long because of the fact the money is used as a qualified educational price. verify with the account supervisor for all the significant factors.