Roth IRA for DD

[srblanco7]

DD is now gainfully employed on a part time basis (says the excited parent). I'd expect her to earn about $5k in 2020 before she starts college. Our financial situation is fairly solid, and depending on her college choice and the overall package she obtains, I was contemplating opening and funding a Roth IRA for her. Has anyone else done something similar?

[Jluke]

Good idea. assuming she meets the criteria (W-2 income or whatever the rules are).

why wouldn’t she contribute her earnings? Is she strictly saving that
money or does she have expenses?

if she is saving will that affect any financial aid for college?

does she have existing savings that could be moved to the Roth?

You may want to match what she contributes as that might be a better life lesson. Unless she is a natural saver then it wouldn’t matter.

A few things to consider when opening and finding this account.

[kork13]

You may want to match what she contributes as that might be a better life lesson. Unless she is a natural saver then it wouldn't matter.

This is a good point. Even if she needs most of her earnings for various expenses she's responsible for, the idea is to reinforce saving as a priority. So maybe you match very generously -- say, 5:1 -- where she puts in $1k/yr, and you top it up to to $6k (or whatever she maxes out at)...or whatever you both are comfortable with.

Otherwise, I'd say that's a great idea. I started my Roth IRA as a college junior, and by my senior year, I was maxing it out. 13 years of maxed contributions later with a basic 3-fund portfolio, that Roth IRA is at ~$140k. Fantastic way to give her a headstart on life/retirement.

Will she be working a PT job while she's in school? Sounds like these earnings are only before starting school... but there are social/personal benefits to working through school, at least to an extent, even if parents are covering the costs. Just a thought.

[sblatner]

We did this for our two boys. We contributed $2k per year for five years as long as they received income. Our intention was to get it set up so that when they wanted to fund it, it would be easy. Our youngest left a job and rolled his 401k into his Roth this year. I was proud that he didn't cash it in!

[srblanco7]

Good idea. assuming she meets the criteria (W-2 income or whatever the rules are).

why wouldn’t she contribute her earnings? Is she strictly saving that
money or does she have expenses?

if she is saving will that affect any financial aid for college?

does she have existing savings that could be moved to the Roth?

You may want to match what she contributes as that might be a better life lesson. Unless she is a natural saver then it wouldn’t matter.

A few things to consider when opening and finding this account.

Thanks for the thoughtful response. I believe that money in qualified retirement accounts (regardless of parent or student) is not required to be reported on the FAFSA.

Based on her prior work at our State Fair the past two summers, she's a natural saver. I was thinking of the portion of her earnings that she puts to savings as her college spending money - we pay tuition, room & board - she buys her books, snacks, etc.

I'm a fan of the "match" approach as well. We've used it with our kids to incentivize them to put earned money into savings - they're solid negotiators - so we agreed to a 50% match on every dollar they add to savings. Could consider the same thinking here - for every dollar she puts to savings, I'll match 50%, but in a Roth IRA.

[srblanco7]

This is a good point. Even if she needs most of her earnings for various expenses she's responsible for, the idea is to reinforce saving as a priority. So maybe you match very generously -- say, 5:1 -- where she puts in $1k/yr, and you top it up to to $6k (or whatever she maxes out at)...or whatever you both are comfortable with.

Otherwise, I'd say that's a great idea. I started my Roth IRA as a college junior, and by my senior year, I was maxing it out. 13 years of maxed contributions later with a basic 3-fund portfolio, that Roth IRA is at ~$140k. Fantastic way to give her a headstart on life/retirement.

Will she be working a PT job while she's in school? Sounds like these earnings are only before starting school... but there are social/personal benefits to working through school, at least to an extent, even if parents are covering the costs. Just a thought.

Thanks Kork. Our thinking is similar - we love the idea of giving her a head start and also getting her thinking about her future after she graduates. Plan is for her to work PT thru college as part of her contribution to her education. We want her to understand the investment we're making in her education and committed to keeping herself focused during her four years in school.

[srblanco7]

We did this for our two boys. We contributed $2k per year for five years as long as they received income. Our intention was to get it set up so that when they wanted to fund it, it would be easy. Our youngest left a job and rolled his 401k into his Roth this year. I was proud that he didn't cash it in!

That's a proud parenting moment!

[Jluke]

Thanks for the thoughtful response. I believe that money in qualified retirement accounts (regardless of parent or student) is not required to be reported on the FAFSA.

Yes. That’s why you may want to get as much of her taxable money/assets into the Roth that is allowed.

im sure you can earmark that matching part if needed in one of your accounts for FAFSA purposes.

Assuming the kids assets count more than parents. I’m a few years away from that but seeing this and another post on bogleheads today about FAFSA already has me stressing over assets accumulated to date.

[kork13]

Correct me if I'm wrong (very possible--a full-ride scholarship meant that I never used it), but isn't FAFSA only used to either qualify for federal aid (if low income, which I gather you aren't), or qualify for federal loans? And if loans are part of the plan, I'd say that the Roth IRA discussion should be moot, with that money focused instead on getting through college debt free. Otherwise, what's the concern about what FAFSA looks at?

I feel like I'm probably missing something.

[srblanco7]

Correct me if I'm wrong (very possible--a full-ride scholarship meant that I never used it), but isn't FAFSA only used to either qualify for federal aid (if low income, which I gather you aren't), or qualify for federal loans? And if loans are part of the plan, I'd say that the Roth IRA discussion should be moot, with that money focused instead on getting through college debt free. Otherwise, what's the concern about what FAFSA looks at?

I feel like I'm probably missing something.

This is our first child going to college, but my understanding is that the schools also look at FAFSA information in determining how much they may offer in scholarships and grants. DD has heard back from 3 schools thus far, two private and one state school, and one of the private schools has come thru with an offer which knocked $20k off their price - meaning their net price was about $5k/year higher than our State school annual tuition, room, & board (TRB).

We encouraged our daughter to cast a wide net with the application process (10 schools) so that she can review multiple offers. With the understanding that our investment in her education would be equivalent to State school TRB. She'd have to work to fund any differential and loans are not an option. Ultimately, if the differential is manageable, we'll work with her to make sure the portion she has to fund is very manageable - want her invested in her education but not overly stressed.

[disneysteve]

my understanding is that the schools also look at FAFSA information in determining how much they may offer in scholarships and grants.

Yes, most schools require students to file the FAFSA to be eligible for any type of aid including scholarship, grants, on-campus jobs, etc.

You've also discovered, as we did, that the whole "state schools are cheapest" isn't always true or at least not to the degree people think. When you factor in aid, the price can often be pretty close. Our daughter went to a good moderately sized private school for only about 5K/year more than the humongous state school up the road. Virtually nobody pays the "sticker price" at those private schools. Our daughter got over 20K/year off that price.

[srblanco7]

Yes, most schools require students to file the FAFSA to be eligible for any type of aid including scholarship, grants, on-campus jobs, etc.

You've also discovered, as we did, that the whole "state schools are cheapest" isn't always true or at least not to the degree people think. When you factor in aid, the price can often be pretty close. Our daughter went to a good moderately sized private school for only about 5K/year more than the humongous state school up the road. Virtually nobody pays the "sticker price" at those private schools. Our daughter got over 20K/year off that price.

Playing the waiting game now. 3 acceptances, 7 pending, and 1 aid/scholarship package offered thus far - from a private school, and it aligns almost exactly with the scenario you present. .

[kork13]

Yes, most schools require students to file the FAFSA to be eligible for any type of aid including scholarship, grants, on-campus jobs, etc.

Interesting, I've never heard that side of it. I just clearly remember my parents telling us "don't bother doing the FAFSA, we make too much for it to mean anything." (and note, my parents were an elementary school teacher & a mid-level federal employee...not exactly rolling in dough) And each of us got a variety of scholarships from our universities, and my brothers both worked on-campus jobs. Perhaps just a quirk of where each of us happened to go to school...?

[disneysteve]

Interesting, I've never heard that side of it. I just clearly remember my parents telling us "don't bother doing the FAFSA, we make too much for it to mean anything." (and note, my parents were an elementary school teacher & a mid-level federal employee...not exactly rolling in dough) And each of us got a variety of scholarships from our universities, and my brothers both worked on-campus jobs. Perhaps just a quirk of where each of us happened to go to school...?

It's definitely school-specific but requiring a FAFSA is pretty common practice from what I've heard from others.

[moneybags]

Playing the waiting game now. 3 acceptances, 7 pending, and 1 aid/scholarship package offered thus far - from a private school, and it aligns almost exactly with the scenario you present. .

Helpful tip: you can ask for more scholarship money! If you have multiple scholarship offers, ask your school of choice to match a different offer. I don't think this will work with a state school, but can at a private school. We did this and saved several thousand dollars.

Many colleges want your FAFSA even if you aren't qualifying for federal funds. I'm not sure the reasoning, but our son's school offered you extra scholarship money if you filed your FAFSA early.