4 things to know about Kiddie Roth IRAs

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(MoneyWatch) If you're saving for your child's education, have you considered putting some of that money into a Roth Individual Retirement Account?

Under the right circumstances, the Roth can be an excellent vehicle to save for college. If you're interested, you've got until April 15 (tax day) to put money into a kiddie Roth for the tax year 2012.

Here are four things you need to know about Roth accounts for minors:

1. Your child must earn a paycheck. Because a child must be earning income to qualify for a Roth, this retirement account is usually only feasible for teenagers. You can't contribute more to a Roth in a single year than the child makes. The maximum yearly amount that you or your child can contribute is $5,500.

2. A Roth won't hurt aid chances. Money sitting in a child's Roth won't hurt his or her chances for financial aid. That's because Roth cash won't be counted in financial aid calculations. The Free Application for Federal Student Aid doesn't even inquire about Roth assets or contributions. The FAFSA, however, does ask about contributions into traditional IRAs.

3. Roth withdrawals do count in aid formulas. A student must declare money withdrawn from a Roth. Student assets are assessed at a maximum of 20 percent or 25 percent depending on the aid formula. (In contrast, parent assets are assessed at a maximum of 5.64 percent for financial aid purposes.)

There is a way to get around this problem. Don't use your child's Roth to pay for college until after you've filed the last financial aid form. After you've completed the final aid form in the spring of your child's junior year, you can tap Roth assets without getting penalized.

4. Education withdrawals are tax-free. You can use a Roth to cover college costs without paying taxes on the withdrawals. You can enjoy this perk as long as you only withdraw the Roth contributions and don't touch the earnings in the account.