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Opening roth IRA for kids

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  • Opening roth IRA for kids

    I have been researching about opening roth IRA for my child who is only 11 year old. I am seeking advice from people have done this or know how to do this. I know certain investment companies such as Fidelity have custodial roth IRA account for kids. The limit per year is the child's earned income or $6000, whichever is less. Does my child have to file tax to prove that she is earning income? I was told that alternatively, they can keep a log of money made. Can they make money without filing tax and still contribute to roth IRA? I just can't imagine kids getting audited for not filing tax for the money they make doing house chores.

  • #2
    For 2021, 2020 and 2019, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can't be more than:
    • $6,000 ($7,000 if you're age 50 or older), or
    • If less, your taxable compensation for the year
    That's from the IRS website. You have to have taxable income to contribute to an IRA (unless you're married and filing jointly).
    ---
    When a dependent (child or adult) may need to file a tax return

    Taxpayers who are claimed as a dependent on someone's tax return are subject to different IRS filing requirements, regardless of whether they are children or adults. A tax return is necessary when their earned income is more than their standard deduction.

    The standard deduction for single dependents who are under age 65 and not blind is the greater of:
    • $1,100 in 2020
    • Or the sum of $350 + the person's earned income, up to the standard deduction for an unclaimed single taxpayer which is $12,400 in 2020.
    A dependent's income can be "unearned" when it comes from sources such as dividends and interest. When a dependent's unearned income is greater than $1,100 in 2020, the dependent must file a tax return.
    That's from the turbotax website. So yes, if your child makes more than that they should be filing a tax return. Doesn't have to be a formal w2 or 1099 but should have at least receipts and descriptions of what they did to prove it's reasonable. Otherwise, why couldn't I just have one of my friends 'hire' them to dog sit and pay them $6000 because they were so good at their job.

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    • #3
      Our oldest got a part-time job (one weekend day and summers) as a cashier in high school.

      We helped him open a Roth IRA (at a local bank down the street) and matched what he put in in order to max. We matched every year until he graduated from college. It was a tremendous learning experience for him (and us as well). Fast forward ten years...he is on his own and still able to contribute to his Roth. He realizes now what we did and is so appreciative that we helped him jumpstart his Roth. I knew he was hooked when he told us that he had moved all of the money to a Vanguard fund to avoid high fees. We had a teachable moment with him in high school and it will pay off in his future.

      (I put the money in the bank down the street so he could physically contribute. Yes, I know Vanguard is better, but I was trying to make a "Mom" point....)

      If your child has legitimate income, then I would go for the Roth.

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      • #4
        I don’t think getting an allowance for doing house chores would be considered legitimate earned income (unless cleaning someone else’s house, I suppose).

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        • #5
          Originally posted by Centrum250 View Post
          I just can't imagine kids getting audited for not filing tax for the money they make doing house chores.
          good thing thats not earned income....

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          • #6
            Originally posted by Bev View Post
            Our oldest got a part-time job (one weekend day and summers) as a cashier in high school.

            We helped him open a Roth IRA (at a local bank down the street) and matched what he put in in order to max.
            So he earned enough to max out the Roth IRA, he maxed out the Roth with that, and then you gave him that amount back from your own money so that he could still have some money to spend? Or he earned less than the max and you just put additional in to max out the amount in the Roth?

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            • #7
              Originally posted by Centrum250 View Post
              Does my child have to file tax to prove that she is earning income? I was told that alternatively, they can keep a log of money made. Can they make money without filing tax and still contribute to roth IRA? I just can't imagine kids getting audited for not filing tax for the money they make doing house chores.
              You are trying to have the cake and eat it too.

              No, house chores money is not earned money that can be used for Roth IRA. Unless they work a legitimate work that earns them an income, you cannot open a Roth IRA for the kid.

              Roth means money invested post taxes. You do not want to pay taxes and yet open a Roth. The reality is that the kid might not owe taxes but it does not mean not filing a tax return for that amount earned.

              As I said in another post about using the photos of your children on website and paying outrageous sums, curb the enthusiasm to open Roth too early using dubious means of earned income. Let the child earn legitimate income when a bit older and open a Roth then.



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              • #8
                Originally posted by Centrum250 View Post
                I just can't imagine kids getting audited for not filing tax for the money they make doing house chores.
                Whether or not they meet an income tax filing requirement or do so is irrelevant. You are a professional. The likelihood of the IRS catching you or your child should not be a factor in any consideration. What would that be teaching them.

                There is well established precedence that paying minor children for performing household chores* is never taxable compensation. No taxable compensation, not eligible for Roth IRA contributions. Wait until they have legitimate taxable compensation from working for others when they are teenagers.

                Or better yet, if you own a business (i.e. practice, etc...). Hire your children at a task appropriate age as employees. They must perform productive business necessary work tasks for a fair market value (FMV) wage. If you have a solely parent owned unincorporated business, no FICA is required until age 18 and no unemployment insurance is required until age 21.

                *There may be circumstances where you would or better yet, have hired third party household help for specific tasks (i.e. babysitting, yardwork, etc...). In those cases many tax professionals believe it is legitimate to hire your own teenagers instead as household help for those work tasks. The same payroll tax exemptions as hiring hour children in a solely parent owned unincorporated business apply.

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                • #9
                  To Anne: Yes, to the first question. He earned enough to max out the IRA. To encourage him to save in the IRA, we matched what he put in. That way, as you said, he could have some money to spend. Of course, when the second kid started working...he had other ideas on saving. Now he wishes he had taken us up on the Roth IRA match when he started working in high school. It's a journey...

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                  • #10
                    Is your child performing a service that someone else pay the same amount?
                    If yes, are you really sure?
                    Why aren’t they doing it?

                    I worked as a data center operator in high school. When I could work night shift and on weekends all by my lonesome I got paid by the company.
                    Made some else’s life easier and got paid.

                    Prior to that, shoveling snow, lawns etc.

                    My concern with raising children is work ethic much more than tax laws. Roth is simply a byproduct, rather than a goal.

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                    • #11
                      I have our teens working in the office, started at age 15 with permitted state labor restrictions. They're on payroll, file taxes annually and we contribute $6K rIRA for each of them. The business gets expense deduction just like all other employee costs, and they're taxed at their income tax rate of essentially 0.

                      Waiting 3 or 4 years until your child can formally engage in productive work is probably better. In the meantime make sure you are doing 529's and family HSA if eligible.

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                      • #12
                        It seems like this comes up every year...

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                        • #13
                          On some blogs/websites, it appears to me (and this is a personal observation) that certain benefits are highlighted without much (if any) attention paid to the disadvantages/pitfalls. It can really make life difficult for some professionals.

                          I just hate it when that happens.
                          Last edited by jfoxcpacfp; 12-08-2020, 06:53 PM.
                          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                          • #14
                            SO this is my scenario: I am paying my 7th grader 10 dollars/hour to tutor our 1st grader in math given that online/covid school is crap. She tutors the younger child 2-3 times/week. This is legit--she really does it. I am saving a ton of money as the going rate for tutors is 50/hour and I am saving my energy by being able to farm it out to someone else ie my kid. So if she is making 30dollars weekly she will have somehwere around 1-1.5k in earnings this year. is it OK to open a custodial roth for her? Does she need to open her own bank account or can it be through mine? Do I need to report any fed or state taxes?
                            thanks!

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                            • #15
                              We started early: all cash earnings had to come from a separate household for legitimate work performed and we kept a detailed log. Once they are in high school, depending on your area, it will be relatively easy for them to earn at least $6,000 per year.

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