Minimum age for start of Roth IRA?

[tuni88]

My nephew just turned 18 and is headed to the university this fall as a freshman. As part of his financial aid package he'll work part-time on campus and be issued a W-2 at year-end. Maximum earnings are $3000.

Is he old enough to start a Roth IRA all on his own? Could he contribute all $3000 of his earnings?

[masteff]

Is he old enough to start a Roth IRA all on his own? Could he contribute all $3000 of his earnings?

You and he will want to review IRS Pub 590 http://www.irs.gov/pub/irs-pdf/p590.pdf but yes and yes.

[ESOP Guy]

For what it is worth one of the greatest gifts a grand parent can give a kid, in my opinion, is a gift to fund a roth at those ages. My 15 year old just got his first job. I am hoping between my dad and I we can fund a roth for him for 100% of his earnings. Imagine 50 years of compound earnings tax free. That assumes that my son doesn't at some point take the money and run. He will have that control at 18.

[John G]

Yes, there is NO age limit on a Roth. Absolutely a child can have one if they meet the general conditions of earned income.

The kid does NOT have to fund the Roth, anyone can.

Search on the word "child" and you will find many entries on this message board on this topic.

Note: not every custodian supports kids Roths. Etrade did not used to do so, but Schwab always has. I have done starter Roths for five relatives and my own two kids so far. One of the big benefits is that the student gets an early peak into the world of investing. The educational value of a small starter investment may vastly exceed the value of subsequent wealth. I have 4 out of seven actively tracking their starter portfolio and asking very good questions. The other three got started just in the past year and it remains to be seen how engaged they become. Kids are often fascinated with different ways of making money. When I open a Roth for a child it is ussually for someone in the 14-20 range. At some point, I give them a subscription to Kiplinger Financial which also covers education, credit cards / debt, owning a house and other things relevant to someone under the age of 30.

[ETA Consulting LLC]

For what it is worth one of the greatest gifts a grand parent can give a kid, in my opinion, is a gift to fund a roth at those ages. My 15 year old just got his first job. I am hoping between my dad and I we can fund a roth for him for 100% of his earnings. Imagine 50 years of compound earnings tax free. That assumes that my son doesn't at some point take the money and run. He will have that control at 18.

The income must be 'earned'; either paid on a w-2 or on a 1040 (Schedule C less 1/2 self-employment taxes). You cannot contribute allowance. As a rule of thumb, if you didn't pay FICA, then you don't consider it as income for IRA purposes.

Good Luck!

[ESOP Guy]

For what it is worth one of the greatest gifts a grand parent can give a kid, in my opinion, is a gift to fund a roth at those ages. My 15 year old just got his first job. I am hoping between my dad and I we can fund a roth for him for 100% of his earnings. Imagine 50 years of compound earnings tax free. That assumes that my son doesn't at some point take the money and run. He will have that control at 18.

The income must be 'earned'; either paid on a w-2 or on a 1040 (Schedule C less 1/2 self-employment taxes). You cannot contribute allowance. As a rule of thumb, if you didn't pay FICA, then you don't consider it as income for IRA purposes.

Good Luck!

Yeah, the local soccer league claims the teenagers that ref their games are all independent contractors. (I suspect they are misclassifying them, they should be employees in my mind.)

By the way the wet spring we had cut into his earnings. Does anyone know if we have to file a return for him to establish he had earnings? As a rule if your self-employment earnings are below some number you don’t have to even file a SE tax return and unless the fall season goes well he might be below that number.

[ETA Consulting LLC]

What would exempt him from paying FICA?

[masteff]

Does anyone know if we have to file a return for him to establish he had earnings?

After reviewing Form 8606 and Publication 590, the best I can come up with is better safe than sorry.

ETK - the SE tax threshhold is 400 bucks of net earnings http://www.irs.gov/pub/irs-pdf/i1040sse.pdf

[ESOP Guy]

What would exempt him from paying FICA?

I just double check the Sch SE and if you have <$400 in SE earnings you don't file the form and pay the tax.

[ETA Consulting LLC]

So, you're going to fund a Roth for an amount less than 400?

[ESOP Guy]

So, you're going to fund a Roth for an amount less than 400?

If I think I can find a fund that will do it and not eat my son's lunch in fees sure. My thinking is when he hits 16 he will be able to get more work so it can grow from there.

[John G]

I have never heard of the IRS auditing a kid with $800 in earnings. Now there is a real return on invested manpower. Do ya think the IRS wants to be in the headlines for taking a kid to court? That's right up with some town in Georgia (did I get the state right?) recently going after two girls running a lemonade stand for not having a permit. Common sense gone wild? And that made a couple of national news stories just last week - along the lines of what is more American than kids running a lemonade stand and showing a little entreprenurial spirit.

Bridge clubs hire kids to caddy at tournaments. Junior Achievement hires kids for one day "environmental" duties - aka trash clean up. The list of small amount, short duration "stipends" that are used in our society is huge. Technically all of these kinds of arrangements are probably against the law. But I don't think many people want to waste time chasing 6.25% of $50.

Rant off...

Practical considerations of a kid IRA. You coul get started by bridging two years if your kids earnings are low. For example, lets say the kid earns $500 this year and might earn $1500 in 2012. On January 2 of next year, you can open a ROTH IRA and fund it for $2,000 - $500 for the prior year, $1500 for the coming year "on spec". There is no rule that says the earnings must be booked before the contribution.

Small initial amount threshold: Some custodians want to see $2000 or more as the initial contribution. However, that is often waived if you set up a monthly contribution plan drawing upon a savings or checking account. Fees may be waived if you just ask, especially if you have significant accounts with the custodian. If a custodian puts up walls, first ask for the number of the backroom IRA/ROTH dept. which tends to know a lot more about special rules. If you don't find success, then try another vendor.

I've done this about 7 times. Its not hard. Often the relative is not even living in my home state. In the internet era, there is a way to get almost anything done by Google, email, wire transfers, etc.

[masteff]

I see it as teaching him a valuable lesson regardless the size of initial contribution. He for sure can't rely on Social Security.

Of the top of my head, see if the investment firm you use for your own IRA will waive annual fees for his IRA (I assume most of them still charge a fee if the balance is less than several grand). For example, Fidelity will combine accounts of family members in the same household if you complete the proper form. Worse comes to worse, go to your bank and put the Roth in a CD just to get it started.

[John G]

On earned income: paychecks work, also income claimed on 1040. If you own a small business, you can find something for your kids to do to help out - cleaning up, filing, copying, deliveries, etc. and issue them a W2. Lots of teenagers have income from newspaper routes, babysitting, lawnmowing, yard work, etc. Some of these are poorly documented, but they generally may count towards earned income.

What is NOT earned income: interest, dividends, gifts, and allowances (putting aside that most kids do something to earn an allowance).

Oddball things that could become earned income: a toddler getting an appearance fee in a commercial (sort of a modeling fee), kids working in a family business (likely to produce a W2), internet services (my daughter dated a kid who was making over $300 a month by selling "clicks" to gamer websites), street musician, etc. There is a 17 year old guy in my neighborhood that is getting paid by banks for cleaning up foreclosed properties!

When I was 10 I ran a circus in my backyard and every kid paid fifteen cents to watch pet tricks and get a glass of Koolaide...lets not turn the world over to guys in white shirts who are not terribly inventive. There are thousands of ways to make money if a person is inspired. The planet would be pretty boring if some humans did not have a gift for inventing products and services.

[ETA Consulting LLC]

Thank you John. You articulated your point well.

Just so we're clear with respect to questions directed toward me; I, personally, do not care if a parent fund a kid's Roth IRA for $2 million (just making a point), but would also imagine that in such event the IRS would then audit (still making the point). I was merely engaging in a discussion of the rules; primarily that allowance is not earned income that can be contributed to an IRA. Sure, we can probably do it and the IRS would may not waste resources to challenge it. My contention was that recommending everyone do this may be be appropriate advise given that, as a rule, allowance isn't earned income that may be contributed to an IRA.

Good Luck!

[John G]

... top of my head....I assume most of them still charge a fee if the balance is less than several grand

Its pretty easy to Google or check a few websites. What you will find is that some custodians recognize that Roths are long running accounts that are highly desireable. Many will drop the annual fee if you just ask them. Others will eliminate the fee if you regularly contribute every month. Opting for electronic monthly statements saves processing and postage costs and is often a key to getting no annual fee. Finally, bigger balances or using a family based balance can also give you leverage to drop the annual fee.

The costs of managing online accounts is low and going down. Companies that are forward thinking often give up that annoying fee to secure new business.

And...if you are switching and IRA from one custodian to another, some brokerages will repay you for any account closure fees. For example, I recently got $300 from Schwab when we moved some accounts and got dinged by the older custodian for an exit fee.

Mainly I have been talking about the big major internet using brokerages like ScottTrade, Etrade, Fidelity, Schwab, etc. You will also find much the same policies at the well run mutual fund families.

Banks seem to be going the other way - fee happy to boost earnings after all of the housing meltdown. Its harder to get a bank to waive fees these past two years. For example, a standby signature line of credit that used to be completely free moved to $80 a year. I told the bank I would cancel the account if they insisted on charging...and that's what I ultimately did. Getting a late payment waived by a bank used to be a relatively easy thing to do...not many first line bank clerks have the authority to do this anymore.

Do the capitalist thing - price compare and take your Roth business to one of the many shops that will not charge you a fee. Roth fees are not the primary criteria for selecting a custodian - convenience, breadth of services, quality of website, available research are other things to consider....but when there are so many custodians that won't charge an annual fee, why not pick from among them.

You can't search on key words like "waiver", "annual fee" or "free" and find many other threads on this topic.

[Guest jims]

It pretty easy for many young kids to get earned income. They can do it by babysitting, cutting lawns, etc. Those activities easily qualify as household employees and there is any exemption for "employer" reporting and withholding on household employees - maybe $1400 annually (?can't remember). That greatly simplifies for the kid and avoids FICA and independent contractor issues. So cut the grass for a neighbor. The neighbor 'employer' doesn't need to do any reporting and they're acting above board; the kid doesn't need to report or pay FICA and they're acting above board. Voila! Earned income to put in a Roth! Cut a few lawns, babysit a few families and a kid can get enough to have a discount brokerage account and purchase an index fund.