Roth IRAs for children

[rmecc001]

A thread on all-in-one Vanguard funds started touching on this but I thought it made sense to start a new thread dedicated to this.

 

How do you document children's income for the purposes of establishing a Roth? I know WCI pays them as models and can document that from the small business. But lawn mowing was mentioned as the source of the income. Are folks establishing a formal small business to take in the income and then open the Roth?

 

[jfoxcpacfp]

I never opened a formal small business, but I did file a tax return for them. Deposit their earnings to document. If you are paying through your unincorporated business, they will not have to pay SE taxes. Write up a simple agreement listing duties, pay, expected hours per week and have them sign off - this will be more than most do. Give them periodic employee reviews. It's a really good experience for them. I tell business clients it's a way to write off part of the cost of raising your kids, if done properly. The parent contributes to the Roth and helps the child has to budget to use earnings for clothes, entertainment, eating out, tithing, saving, etc.

[rmecc001]

So would that work without an established business on my side of the equation? I am an employed physician without a small business (shareholder in large multispecialty group).

I draw up an agreement, pay them regularly and file a tax return. Then I could deposit the amount I paid them into a Roth? Almost seems to good to be true. I would love to get the kids' Roth started early.

[TheGipper]

Ha.  I can image how the audit will go.  Did you really pay your 10 year old $75/week for babysitting, housecleaning, and yardwork.?  Yes sir, I did.  May I speak with your son?  Umm, no he is upstairs on his iPad.  Any other way to confirm?  Well I wrote up this informal contract and had him sign and filed taxes for him.

All seems pretty silly.

[ACN]

If he does a good job cutting the grass, he gets a $1k bonus per his contract.  Cuts it 5 times, and all of a sudden, max Roth IRA.  :P

[jfoxcpacfp]

rmecc001 wrote:

So would that work without an established business on my side of the equation? I am an employed physician without a small business (shareholder in large multispecialty group).

I draw up an agreement, pay them regularly and file a tax return. Then I could deposit the amount I paid them into a Roth? Almost seems to good to be true. I would love to get the kids’ Roth started early.

Click to expand...

Kids make money all the time babysitting and mowing yards - I really don't understand the insinuations that this is a joke unless you expect nothing of your children. My boys were doing their own laundry at 10 and making all their spending money by 12. They were expected to buy their own cars when they were old enough. I paid for 4 years of college, not at lavish institutions and told them anything beyond was on their own. They weren't spoiled and they are both quite successful today with, I might add, low 6-figure Roth IRAs. Not too shabby in your early 30s.

Sorry, just realized I did not address your question. No, your kids cannot work for you if you do not have a business, but they can work for others. Mowing your lawn would be considered chores/allowance situation.

[Joseph]

TheGipper wrote:

Ha.  I can image how the audit will go.  Did you really pay your 10 year old $75/week for babysitting, housecleaning, and yardwork.?  Yes sir, I did.

Click to expand...

We pay our babysitter $20/hr... it is not difficult to earn $75 in a week is it?

rmecc001 wrote:

 would that work without an established business on my side of the equation? I am an employed physician without a small business

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Yes! If a human has earned income, he can contribute to an IRA.  This is one of the best savings vehicles out there! You do NOT want to miss out on it.  Are you familiar with the common anecdote that WCI uses to show how a small amount can be turned into $9,000,000,000 (that is Billion)?  Again, it is an amazing savings vehicle that fast-tracks to your family legacy to wealthy-naires.

[nyu04]

I'm unsure how WCI pays his kids but after speaking w my CPA  - we pay our kids as 1099s.  They appear on our advertisements/promo materials and they are paid as actors/models etc.  We only started this in 20

jfoxcpacfp wrote:

rmecc001 wrote:

So would that work without an established business on my side of the equation? I am an employed physician without a small business (shareholder in large multispecialty group).

I draw up an agreement, pay them regularly and file a tax return. Then I could deposit the amount I paid them into a Roth? Almost seems to good to be true. I would love to get the kids’ Roth started early.

Click to expand…

Kids make money all the time babysitting and mowing yards – I really don’t understand the insinuations that this is a joke unless you expect nothing of your children. My boys were doing their own laundry at 10 and making all their spending money by 12. They were expected to buy their own cars when they were old enough. I paid for 4 years of college, not at lavish institutions and told them anything beyond was on their own. They weren’t spoiled and they are both quite successful today with, I might add, low 6-figure Roth IRAs. Not too shabby in your early 30s.

Sorry, just realized I did not address your question. No, your kids cannot work for you if you do not have a business, but they can work for others. Mowing your lawn would be considered chores/allowance situation.

Click to expand...

If you don't mind me asking - how much did you put in each year - max amount ?  We only contributed 4k each in 2015 for their modeling/acting on our ads/commercials/etc.  I am unsure if we should do the max 5.5k for 2016 - don't want to raise chances of an audit.  Especially since the kids are only 4 and 7.

[Joseph]

jfoxcpacfp wrote:

I paid for 4 years of college, not at lavish institutions and told them anything beyond was on their own. They weren’t spoiled and they are both quite successful today with, I might add, low 6-figure Roth IRAs. Not too shabby in your early 30s.

Click to expand...

Johanna, did you use any Roth money for their college funds?

[jfoxcpacfp]

Joseph wrote:

jfoxcpacfp wrote:

I paid for 4 years of college, not at lavish institutions and told them anything beyond was on their own. They weren’t spoiled and they are both quite successful today with, I might add, low 6-figure Roth IRAs. Not too shabby in your early 30s. 

Click to expand…

Johanna, did you use any Roth money for their college funds?

Click to expand...

lol, clever doctor. Neither would have worked for me given that my older son graduated in 1999. Interesting factoid - 529s and Roth IRAs were both born in TRA (Taxpayer Relief Act) of 1997. KY had a fund called KEES for students attending college in state, which dried up and has since been reinstated.

You must understand that the main target of my article was not you pro's in established careers, but those in med school/residency (and other lurkers on this site) with families who want to begin saving for college early and don't earn enough to fund every account available. I did not write is as an either/or piece, but to suggest an alternative to consider. You are free to reject it and continue with your plans, of course, but with all due respect, I sometimes sense a rigidity for alternative ideas at times on this site, especially if one is not a Boglehead. Is everything either black or white?

As to whether college costs will remain on the same trajectory or eventually head down to more realistic and affordable levels, we'll have to wait 10 or so years to see who is right. That's just my opinion and I welcome disagreement. It may just be where I live, in western KY but I've seen a significant shift toward trade school and community college in the 15 years since my kids were in college. Trend or anomaly?

[jfoxcpacfp]

nyu04 wrote:

I’m unsure how WCI pays his kids but after speaking w my CPA  – we pay our kids as 1099s.  They appear on our advertisements/promo materials and they are paid as actors/models etc.  We only started this in 20

jfoxcpacfp wrote:

rmecc001 wrote:

So would that work without an established business on my side of the equation? I am an employed physician without a small business (shareholder in large multispecialty group).

I draw up an agreement, pay them regularly and file a tax return. Then I could deposit the amount I paid them into a Roth? Almost seems to good to be true. I would love to get the kids’ Roth started early.

Click to expand…

Kids make money all the time babysitting and mowing yards – I really don’t understand the insinuations that this is a joke unless you expect nothing of your children. My boys were doing their own laundry at 10 and making all their spending money by 12. They were expected to buy their own cars when they were old enough. I paid for 4 years of college, not at lavish institutions and told them anything beyond was on their own. They weren’t spoiled and they are both quite successful today with, I might add, low 6-figure Roth IRAs. Not too shabby in your early 30s.

Sorry, just realized I did not address your question. No, your kids cannot work for you if you do not have a business, but they can work for others. Mowing your lawn would be considered chores/allowance situation.

Click to expand…

If you don’t mind me asking – how much did you put in each year – max amount ?  We only contributed 4k each in 2015 for their modeling/acting on our ads/commercials/etc.  I am unsure if we should do the max 5.5k for 2016 – don’t want to raise chances of an audit.  Especially since the kids are only 4 and 7.

Click to expand...

nyu04 - presume this question was directed at me? I maxed out their Roth IRAs every year unless I couldn't afford to contribute. imo, that has no correlation to whether you will be audited. Remember, too, that Roth contributions are not reported on your tax return. The IRS gets a 5498 each year, but it does not have the age of the contributor. That said, unless your kids are darn good trained models and you would pay the same money to your neighbor's cute kids to model (i.e. - the "arm's-length transaction" concept), I would question them earning enough to max out at those ages. Had my kids been that young when the legislation was passed, I would have probably not paid them as much to clean my office and the like.

[nyu04]

jfox - thank you for your insight, appreciate it.

[johnschr]

This really hits home for my son's situation.  He will be 14 in a couple of weeks and has been working for his grandfather the past 2 summers.  Over that time he has worked his tail off and earned almost $3,000.

 

His grandfather has a small lawn care business on the side ... which he doesn't really treat as a true business.  So long story short, my son gets paid about $10 an hour under the table with no taxes.

 

Initially, my wife and I setup a custodial account for him until we realized this would count against him for financial aid.  I doubt he will get any when that time comes, but didn't want to put too much in the custodial account just in case.

 

We are assuming the our son will continue working for this job for the next 4 or 5 years and we want to figure out the best way for him to invest it.  I like the idea of a Roth IRA for him.  But with no evidence of an official job, I am not sure what steps to take?

Appreciate any suggestions.

[Craigy]

Has a child Roth ever been audited?

[The White Coat Investor]

The key is they have to be doing legitimate work at legitimate rates and it can't be their daily household chores. But lawn mowing and babysitting for other people? Absolutely. Totally counts. Totally legit. And totally should go into a Roth IRA.

So Whitney gets paid to write articles and be a model. There are W-2s and time sheets and tax returns to document it. The other kids are just models, but again, W-2s, time sheets, and tax returns. If they're under 5 or 8 or so you'll likely get an automated questionnaire from the IRS sent out in the mail asking you to detail exactly what the kids are doing. I just wrote "modeling" on there and sent it back and never heard from them again.