Transfer of accounts is simple

Maybe it's because you all made New Year's resolutions to get your kids' finances in order. Or maybe it's because tax season is upon us. Whatever the reason, my e-mail box has been more crowded than usual lately, so I'll tackle several queries this week.

Question: Our daughters have money in what I think is called a UTMA savings account. It's earning a very low rate of interest, and we would like to set up investment accounts for the girls and buy stocks with the money. How do we go about setting up an account in each girl's name?

Answer: Fill out the paperwork at any brokerage firm or mutual fund company, and tell the company you want to set up custodial accounts, with you or your spouse as custodian. That's necessary because the girls are under 18. The accounts will belong to them, but as custodian you will be able to use their savings to invest on their behalf.

By the way, UTMA -- or UGMA -- stands for Uniform Transfers to Minors Act, or Uniform Gifts to Minors Act, the laws under which custodial accounts are established.

Question: My wife and I have a combined income above the maximum for a Roth IRA. Does this make our children ineligible, too?

Answer: Your income has no bearing on your children's ability to open Roth IRAs. But to open Roths of their own, they must have earned income from a job. As long as each child earns less than $95,000 a year, each one can open a Roth and contribute up to $3,000 a year, or the amount of his or her annual earnings, whichever is less.

Question: If an older sibling is paid by her parents for baby- sitting younger siblings, would that count as earned income for a Roth IRA, assuming that the money is declared as income on her tax return?

Answer: Yes, it would. It would be more of an arm's-length arrangement if your daughter were baby-sitting for a family other than your own. But as long as she's doing legitimate work for you, the money she makes counts as earned income for purposes of opening a Roth.

She won't get a W-2 form, so whether she works for you or someone else, have her keep detailed records of when she baby-sits, for whom and how much she makes -- just in case the IRS raises any questions.

Have a question about kids and finances for Dr. Tightwad? Write to Dr. T at 1729 H St., N.W., Washington, DC 20006. Or send the good doctor an e-mail message (and any other questions for this column) to [email protected].

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