Opening an IRA for your Children
Did you know you can open an IRA for your child? According to the IRS, as long as the child has taxable income, an IRA can be opened. As the parent, you will need to become the custodian and the child will be the owner. This means once the child turns 18, in most states, the child can take over the account.
Read: Do Children Need to File a Tax Return to Fund Their Roth IRA?
So why open an IRA? You have probably heard about the Time Value of Money. We all know the longer you invest, the longer your money can work for you. While annual contribution limits still apply, the child can use the money in the IRA for future retirement and even buy his or her first home. Certain rules apply, IRS: Tax Rules for Children and Dependents and the child must be able to file his or her tax return or the parent can on behalf of the child if certain measures are taken. Check out the link above to read more.
Education Savings Plan
When the 2017 Tax Cuts and Jobs Act was signed into law, it opened the opportunity for 529 Plans (College Savings Plans) to be used towards tuition of children from grades K-12. This includes public, private, and religious schools. This is another reason why it is important to open a 529 Plan for you child sooner rather than later.
Note: Be sure to sign up
American Opportunity Tax Credit (AOTC)
With an annual limit of $2,500 per eligible student, you can receive tax credits if you can claim him or her as your dependent. This credit is “only available for the first four years at an eligible college or vocational school for students pursuing a degree or another recognized educational credential” claims the Internal Revenue Service.
Lifetime Learning Credit
Similar to the AOTC, the Lifetime Learning Credit affords you the ability to claim a tax credit but at a slightly lower amount of $2,000 per tax return but can be for both graduate and undergraduate students. As of the writing of this article, this credit can be claimed for an unlimited number of years.
Note: Only one education benefit can be applied for the same student and the same expense. For example, a tax return cannot take the American Opportunity Tax Credit and the Lifetime Learning Credit for Child A with Expense A.
Gifts to Minors Act
Adopted by all States, the Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act were developed to make tax burdens easier when it comes to monetary gifts or transfers of money to minors
Uniform Gifts to Minors Act (UGMA)
The UGMA allows a person to donate gifts to a minor that is free of tax burdens. For example, if you or a grandparent has a trust fund, cash, securities, etc. but is usually only gifts of cash or securities. Check each state rules to verify your local area. This benefit saves the child money and waives a tax bill.
Uniform Transfers to Minors Act (UTMA)
With somewhat similar tax benefits of the UGMA, the UTMA affords tax benefits for “any kind of property, real or personal, tangible or intangible, can be transferred to a custodian for the benefit of a minor” according to the Social Security Administration.