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Roth IRA for Kids


John G

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Does it make sense to open a Roth IRA for kids?

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Its Tax Season (I was born on tax day!) and I think it helpful to open up a new topic about KIDS and investing while lots of folks are thinking about funding their own IRAs.

Any child or grandchild can have a Roth IRA if they have earned income - from working at McDonalds, a newspaper route, baby sitting, lawn mowing, snow shoveling, being a model in photos, etc. Note, interest, allowances, inheritances, etc. are not considered "earned income". If you are a small business owner, you could employ your kids to sweep up the store, hand out flyers, do filing, etc. and their income could be counted.

Contributions do not have to come from the child! Any parent, grandparent, uncle or family friend can donate funds for the child's account.

Can a minor have an IRA - sure. Some potential custodians do not want to deal with people younger than 18, but many like Charles Schwab will open an account for a minor.

You don't need mega bucks to start. Some minimums for a single lump are around $1,000. But many custodians will open an account for less if there is a monthly stream of deposits. You can accumulate cash in a Roth until you have enough to buy shares of a mutual fund or ETF. Pick a few options and let the minor make the decision!

WHY DO THIS?

1. Start your child on an investment education. Saving for the future. Tax issues. Investing in a better tomorrow by owning stocks of growing companies. What is a mutual fund? What the are benefits of ETFs! (ask that one of the average adult) The mathematics of compound growth - doubling assets and the rule of 72. Etc. Give a minor a huge leg up on their contemporaries. What they will learn in the first few years will exceed what some 30 somethings are only now starting to learn by reading Kiplinger of Money magazine.

2. The value of a tax shelter works best if it is started early.

3. You set an example for them. Talk about money matters. Its not just about a retirement nest egg. It is also about financial comfort and freedom.

4. You might stat them out at a specific level but then offer them a match.

I now have 8 notches in my Colt. I started my kids when they were teenagers. I then did matches with nieces who were just exiting college. Now I am working on other family members.

Its pretty cool when a tuba player and a theater major in their 20s can actually talk about diversification and the differences between stocks and CDs.

If you have done this...perhaps you can add a couple of paragraphs about how you did it and the childs response.

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You have to take into consideration that a lot of jobs for children, such as babysitting, lawn mowing, etc. are under the table for tax purposes. If the child is going to base the Roth IRA on the income, the income will have to be reported, probably as self-employment income. That may not matter for income tax purposes, but it will involve SECA taxes.

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  • 6 months later...

These jobs (babysitting, lawn mowing, etc.) that you say are "under the table" for tax purposes can actually be above the table without tax implications.. If a minor is getting paid cash (even up to a couple thousand dollars annually!) for babysitting, they have a specific exemption from taxes as a household employee. It is not self-employment income and it is not under the table and they don't owe any FICA taxes either.

So there should be no fear of claiming it as earned income in order to contribute to the Roth IRA but not claiming it as income for a tax return. The child does NOT have to file a tax return just so they can contribute to an IRA. They can make reasonable amounts of money, contribute to an IRA and NOT be "under the table". They can be fully legit. Start these kids out early - its makes a great financial education.

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Please provide the authority for your statements and explain when filing is not necessary with respect to earned income. I cannot tell for sure, but it appears that you are confusing the obligations of the payer and the payee. The free pass you give on a "coupe of thousand dollars" is very suspicious.

While it is true that earned income may not ultimately be taxable for some reason, contribution to a Roth IRA requires earned income and cannot exceed earned income. If one is going to assert receipt of earned income (by contributing to a Roth IRA), it is certainly best practice to report the income, even if the income tax liability is zero. A schedule SE (for SECA taxes) must be submitted if self-employment income exceeds $400. Contributing to a Roth IRA may get you an audit if tax returns are not filed. An audit is no fun, especially if one has no records, even if there are exceptions to filing because the income is below the filing threshold.

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These jobs (babysitting, lawn mowing, etc.) that you say are "under the table" for tax purposes can actually be above the table without tax implications.. If a minor is getting paid cash (even up to a couple thousand dollars annually!) for babysitting, they have a specific exemption from taxes as a household employee. It is not self-employment income and it is not under the table and they don't owe any FICA taxes either.

So there should be no fear of claiming it as earned income in order to contribute to the Roth IRA but not claiming it as income for a tax return. The child does NOT have to file a tax return just so they can contribute to an IRA. They can make reasonable amounts of money, contribute to an IRA and NOT be "under the table". They can be fully legit. Start these kids out early - its makes a great financial education.

https://www.irs.gov/uac/Reporting-Miscellaneous-Income

Fees received for babysitting, housecleaning and lawn cutting are all examples of taxable income, even if each client paid less than $600 for the year. Someone who repairs computers in his or her spare time needs to report all monies earned as self-employment income even if no one person paid more than $600 for repairs.

I have no idea what you are talking about. IRS guidance seems to clearly contradict your statement.

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