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Funding a Roth IRA and Roth 401k for a 19 yo making $6,000/year. $12,000?

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  • Funding a Roth IRA and Roth 401k for a 19 yo making $6,000/year. $12,000?

    My son turned 19 this month. He is in college, but will work for his previous employer during the summer. He was sent info on signing up for the company 401k/Roth 401k. If he makes about $6,000/year can he put $6,000 in his Roth IRA and $6,000 in the Roth 401k. We (his parents) would be funding one or both of these accounts. Put another way, can he fund the two accounts with $12,000 even though his earnings will only be $6000? I suspect he can, but my searches thus far have not yielded an answer. Thanks for any help!

  • #2
    No my understanding is that it must be earned income, so only 6k total. Hopefully someone else will chime in who knows for certain.

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    • #3
      My understanding is he has to be the one to do the Roth 401k and he can put $6k in there. If you give him $6k and he puts it in a Roth IRA that is kosher, so $12k total in Roth at age 19. What a gift you are giving him!

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      • #4
        Originally posted by wideopenspaces View Post
        No my understanding is that it must be earned income, so only 6k total. Hopefully someone else will chime in who knows for certain.
        I agree. He needs to earn the additional 6k for the Roth and it can't be gifted money. His irs return should show 12k earned income.

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        • #5
          He could earn 12k and you could gift him up to 16k per year to spend and replenish his retirement money but only the total amount earned by him can be put in retirement vehicles.
          That's understanding.

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          • #6
            I though that IRA and 401k limits were completely separate so long as the reported W-2 income supports the IRA contribution. I don’t think the W-2 reports Roth 401k contributions. I’d be interested in Johanna or SR’s opinion on the matter.

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            • #7
              Originally posted by GasFIRE View Post
              I though that IRA and 401k limits were completely separate so long as the reported W-2 income supports the IRA contribution. I don’t think the W-2 reports Roth 401k contributions. I’d be interested in Johanna or SR’s opinion on the matter.
              This was my understanding as well.

              Following for a truly expert opinion.

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              • #8
                His employer w-2 contributions will be after tax, FICA, Medicare deductions.
                The Roth 401k deduction he will still have taxable w-2 income .
                Voluntary contributions- check the box.
                Personal IRA requirements are separate. His w-2 earnings would support rIRA contribution.
                Funding an IRA can be made from any source.
                Hopefully Johanna or SR will chime in.

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                • #9
                  GasFIRE and Tim are correct.

                  IRA contributions are limited to the lesser of the IRA contribution limit and an individual's IRA compensation. For a W-2 only young individual this would be their W-2 Box 1 Wages.

                  Only pre-tax traditional employee deferrals reduce an individual's W-2 Box 1, not post-tax designated Roth deferrals. Therefore, the same W-2 wages can be the basis for both Roth 401k deferrals. and IRA contributions.

                  While IRA contributions can come from any source, including the parents. 401k deferrals can only be deducted from payroll after all mandatory deductions.

                  If an individual's W-2 wages are $6,000, they will not be able to make 6,000 in employee deferrals. It will be limited to their net pay after deductions for FICA taxes, income taxes, Section 125 employee share of benefits, etc...

                  Before the start of employment, the son should file a Form W-4 to claim exemption to federal income tax withholding. Some states have no income tax or use the federal form, but the majority of states have their own income tax withholding form.

                  I have no knowledge of those state's forms or which ones provide for withholding exemption.

                  P.S. You can certainly gift him some or all of what his net pay would have been. My recommendation is for him to have; "skin in the game", so to speak.

                  ​​​​​​​I would reduce any gift to what his net pay would have been by at least 15% of his gross pay. Having been 19 once upon a time, I would suggest gifting this amount on the very day he gets his much reduced paycheck.
                  Last edited by spiritrider; 03-26-2022, 05:57 AM.

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                  • #10
                    This represents an opportunity for those with children that are entering the summer job phase of their lives. A chance to build a real benefit and teach them to save.
                    1. Find a summer job. Match them for r-IRA contribution.
                    2. Find a summer job with a 401k roth immediate participation option. Match them for the 401k roth contribution.
                    3. Unlikely the company match would vest. But guess what, parents are matching 100% .
                    2x matching for one summer job should be a big motivator. I would even pickup spending money to plant the saver seed.

                    This strategy is far superior than some of the contrived “jobs” for teens. It could actually motivate them to work overtime.
                    Hard work, importance of savings and paying attention to taxes and investments are all positive traits you want kids to learn. It’s their money, skin in the game.
                    Who would be surprised that a 401k Roth would motivate a teen? I would.

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                    • #11
                      Note that most but not all 401k plans have age (usually 21) and many have service (usually one (1) year of 1,000 hours)* requirements.

                      The OP should verify that the son is actually eligible for the 401k. Often this information is sent to all employees regardless of their eligibility.

                      *The SECURE Act added a requirement that part-time employees with three (3) consecutive years of 500+ hours are automatically eligible. No service prior to 1/1/21 is counted. The earliest eligibility under this provision is 1/1/24.

                      Note: These both are maximum requirements. An employer can opt to have no employee eligibility restrictions and allow all employees to immediately participate on day one.
                      Last edited by spiritrider; 03-26-2022, 07:15 AM.

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                      • #12
                        Originally posted by Tim View Post
                        This represents an opportunity for those with children that are entering the summer job phase of their lives. A chance to build a real benefit and teach them to save.
                        1. Find a summer job. Match them for r-IRA contribution.
                        2. Find a summer job with a 401k roth immediate participation option. Match them for the 401k roth contribution.
                        3. Unlikely the company match would vest. But guess what, parents are matching 100% .
                        2x matching for one summer job should be a big motivator. I would even pickup spending money to plant the saver seed.

                        This strategy is far superior than some of the contrived “jobs” for teens. It could actually motivate them to work overtime.
                        Hard work, importance of savings and paying attention to taxes and investments are all positive traits you want kids to learn. It’s their money, skin in the game.
                        Who would be surprised that a 401k Roth would motivate a teen? I would.
                        My 13yo went out on his own and got a job at the zoo for the summer (along with a bunch of his friends). I don't know what the zoo is thinking hiring a bunch of 14 year olds but I'm hoping it's a good learning experience! I've told him he can "live on half" and put 10% to taxes and 40% to a roth IRA and we will match the contributions. It won't be much money but hoping it will get him a little excited about investing for the future. Or perhaps he'll get fired after 2 days 😆, we shall see.

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                        • #13
                          You guys are very kind, but no way I could have come close to SR’s responses. Very glad I didn’t see this thread until tonight 😂.
                          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
                            Originally posted by wideopenspaces View Post

                            My 13yo went out on his own and got a job at the zoo for the summer (along with a bunch of his friends). I don't know what the zoo is thinking hiring a bunch of 14 year olds but I'm hoping it's a good learning experience! I've told him he can "live on half" and put 10% to taxes and 40% to a roth IRA and we will match the contributions. It won't be much money but hoping it will get him a little excited about investing for the future. Or perhaps he'll get fired after 2 days 😆, we shall see.
                            Might poke the bear. 14 year old asking if he can contribute to a 401k Roth would blowup the office at the zoo. Can you imagine the staff? “This kid wants to max out a 401k Roth! “ What the heck is that?

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                            • #15
                              I know from a professional TPA acquaintance that this occasionally blows employer's minds. There is no 401k minimum eligibility age unless the plan has elected such an eligibility restriction.

                              Even minors can enroll with UTMA account registration. This is why most, but not all plans will at least have an age 18 restriction.

                              Even if a 401k plan has no age restriction, expect HR to say it is not allowed. They are wrong and it would be a plan error to not follow plan provisions.

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