Child's Roth

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
tovetove
Posts: 15
Joined: Mon Apr 14, 2014 4:34 pm

Child's Roth

Post by tovetove » Mon Apr 14, 2014 4:49 pm

My 5 year old has had earned income, 1099, taxes paid, etc. I opened a Roth for him last year, average put in so far is 2,000 a year. He's in VTTSX
Vanguard Target Retirement 2060 Fund. I chose the fund based solely on the low entry minimum. Is this fund/type of fund as good as any? I only like "messing" with money one time a year at the most, with his account though I'd like it best to just leave it until forever:)

To answer questions:
Yes the money is from modeling and paid to him. It is a custodial account. It was done by paper, I had to call Vanguard a few times to help.

So keeping it where it is seems to be just fine?

He does have a 529 also, there's about 13,000 in there and it's though Vanguard too.

Oh! One thing I learned that I guess could be advice. You can't invest in your child's Roth every penny made because you have to subtract the amount of tax paid. So if your child makes 1000. You need to pay taxes on this, taxes would be under 200 but can use that as a ball park. You could then safely invest 800. in your child's Roth for that year. I almost had to pay a penalty but just stopped a monthly Roth payment instead. I don't know if that made sense. (I'm not an expert by any means)
Last edited by tovetove on Tue Apr 15, 2014 7:21 pm, edited 2 times in total.

User avatar
hoppy08520
Posts: 2147
Joined: Sat Feb 18, 2012 11:36 am

Re: Child's Roth

Post by hoppy08520 » Tue Apr 15, 2014 3:32 pm

I think your child has a pretty good investment advisor. I think sticking with a target date fund is just fine.

User avatar
nebraskaman
Posts: 28
Joined: Tue Apr 30, 2013 2:06 pm

Re: Child's Roth

Post by nebraskaman » Tue Apr 15, 2014 3:37 pm

How does a child of 5 earn 2k in a year?
The early bird gets the worm but the second mouse gets the cheese.

User avatar
rob
Posts: 3071
Joined: Mon Feb 19, 2007 6:49 pm
Location: Here

Re: Child's Roth

Post by rob » Tue Apr 15, 2014 3:40 pm

I see this a lot and while I understand the idea behind it, I'm really dubious.... especially if the money came from the parents in some way or grass mowing or alike (instead of say model income for kids commercials).... but what custodian did you use?
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien

rkhusky
Posts: 7891
Joined: Thu Aug 18, 2011 8:09 pm

Re: Child's Roth

Post by rkhusky » Tue Apr 15, 2014 3:48 pm

Here is an article on the subject:

http://fairmark.com/retirement/roth-acc ... or-minors/
“Intrafamily transfers of this type can be properly viewed as excludable by a higher authority than the language of [the Internal Revenue Code] — a supposition, so obvious that it does not require explicit mention in the Code, that Congress never intended to tax them.”
5 year old's probably won't be mowing lawns or babysitting, but perhaps there is something useful besides modeling that they could legitimately do to have earned income.

Edit: I would consider acting or singing to be in the same area as modeling. And I suppose there are a few gifted kids who make money writing or painting.
Last edited by rkhusky on Tue Apr 15, 2014 4:03 pm, edited 1 time in total.

User avatar
nebraskaman
Posts: 28
Joined: Tue Apr 30, 2013 2:06 pm

Re: Child's Roth

Post by nebraskaman » Tue Apr 15, 2014 3:56 pm

That article makes it sounds dubious at best and illegal at worst, especially in the case of a 5 year old.
The early bird gets the worm but the second mouse gets the cheese.

MN Finance
Posts: 1832
Joined: Sat Dec 22, 2012 10:46 am

Re: Child's Roth

Post by MN Finance » Tue Apr 15, 2014 4:05 pm

Maybe you guys should stick to allocation advice, which was the question, rather than speculating about how the money got into the Roth. We have Roths for a couple of our kids (ages: greater than 0; less than 10).

OP: I used Schwab as a custodian since there were no fees and I like the platform anyway. As a result I used their transaction free ETFs. One Roth is just $300, so it was pretty easy to buy shares to invest most of it. The other is $10,000 which allowed some more flexibility. I elected to use a total market for the small one but split the larger into EM and Total Market. Because they are likely to be a very small part of their retirement I figured I didn't need a glide path. I also figured I'd take as much risk as possible since it could be decades before they know they even exist.

User avatar
nebraskaman
Posts: 28
Joined: Tue Apr 30, 2013 2:06 pm

Re: Child's Roth

Post by nebraskaman » Tue Apr 15, 2014 4:43 pm

I did not intend to derail the subject, I am genuinely curious as I have been wanting to set something up similar for my future children, nieces and nephews.

For allocation addressing the original OP question, I always recommend an applicable target date fund for the check once a year or less crowd. Can't really go wrong there. For that time frame I think 100% total stock market would also be a great choice.
The early bird gets the worm but the second mouse gets the cheese.

dickenjb
Posts: 2941
Joined: Tue Jan 05, 2010 1:11 pm
Location: Philadelphia PA

Re: Child's Roth

Post by dickenjb » Tue Apr 15, 2014 4:55 pm

Well I have my 20 year old in Vanguard TR2050 and the 17 year old in TR2055, so TR2060 for a 5 year old sounds about right. Especially since Vanguard does not offer TR2065 yet. :happy

My children have summer jobs as lifeguards. It is all on the up-and-up. I let them keep 100% of their net, and I match their gross into the Roth IRA's.
Last edited by dickenjb on Tue Apr 15, 2014 4:58 pm, edited 1 time in total.

User avatar
rob
Posts: 3071
Joined: Mon Feb 19, 2007 6:49 pm
Location: Here

Re: Child's Roth

Post by rob » Tue Apr 15, 2014 4:58 pm

MN Finance wrote:Maybe you guys should stick to allocation advice, which was the question, rather than speculating about how the money got into the Roth. We have Roths for a couple of our kids (ages: greater than 0; less than 10).
1) No one made anyone but mod's the forum police [feel free to hit that on the top right :-) ]
2) I don't see allocation questions.. just a question on target funds as a concept
3) To answer that... sure they are fine... as are any number of alternatives appropiate to the childs objectives which could be 60 or more years in this case

Questions remains:
- How can a child have LEGITIMATE earned income that is free and clear from a parental gift - I know of some scenarios but uncommon
- What custodian will allow retirement accounts for minors - as far as I know it's not Vanguard but could well be wrong

Both are fair topics for the conversaion in my view. I have seen that fairmark post some time ago among others..... IF there is a legit way to fund a Roth for a minor then I am interested..... but opinion seems varied on this topic. As far as I know, the IRS has not been clear in their rules.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien

dickenjb
Posts: 2941
Joined: Tue Jan 05, 2010 1:11 pm
Location: Philadelphia PA

Re: Child's Roth

Post by dickenjb » Tue Apr 15, 2014 5:01 pm

rob wrote: - What custodian will allow retirement accounts for minors - as far as I know it's not Vanguard but could well be wrong.
You are wrong. Both of my children's Roth IRA's are with Vanguard.

Vanguard will not let you open the account online if the beneficiary is a minor. Has to be done "old school" by paper and snail mail.

livesoft
Posts: 69629
Joined: Thu Mar 01, 2007 8:00 pm

Re: Child's Roth

Post by livesoft » Tue Apr 15, 2014 5:02 pm

I laughing because everybody should know how young kids easily make money modeling. If you watch ANY television commercials, you see kids ALL THE TIME. Practically EVERY local auto dealership or dentist or really any small business will have the owner's children in the advertisements: flyers, posters, mailings, TV commercials, Christmas cards, etc. Anytime the likeness of the child appears, that's a modeling fee. And it is hard-earned, so they deserve it.

My daughter got paid for modeling. She was very proud to have her photo in advertising material and on posters larger than life-size.
Wiki This signature message sponsored by sscritic: Learn to fish.

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Re: Child's Roth

Post by sscritic » Tue Apr 15, 2014 5:15 pm

dickenjb wrote: Vanguard will not let you open the account online if the beneficiary is a minor. Has to be done "old school" by paper and snail mail.
Which is easily confirmed by anyone not too lazy to read the Vanguard IRA application form. I did it before, so I won't do it again. One box is for if this is a custodial account for a minor. Another box is for if this is a Roth.

Search for IRA kit. They want to force you to apply online, but don't let them bully you. Go paper.

First question, number 1, even before your name (that's number 2):
Traditional IRA or ■ Roth IRA
After 2 comes 3:
3. Custodian information Complete this section only if you’re opening this IRA for a minor.
As usual I lie. I promised I wouldn't look again, but then see what happened? I am so ashamed of looking stuff up for other people. I really have to stop.

User avatar
pjstack
Posts: 1308
Joined: Tue Feb 20, 2007 5:03 am
Location: Harbor City, CA

Re: Child's Roth

Post by pjstack » Tue Apr 15, 2014 8:46 pm

sscritic wrote: I promised I wouldn't look again, but then see what happened? I am so ashamed of looking stuff up for other people. I really have to stop.
Awwww! I hope you never stop! You are a boon to the instruction-impaired.
pjstack

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Re: Child's Roth

Post by sscritic » Tue Apr 15, 2014 8:52 pm

pjstack wrote:
sscritic wrote: I promised I wouldn't look again, but then see what happened? I am so ashamed of looking stuff up for other people. I really have to stop.
Awwww! I hope you never stop! You are a boon to the instruction-impaired.
Hey PJ, maybe we could start a 12 step program for the instruction-impaired. We could even charge a fee and make a killing. The one big problem I see is that the instruction-impaired wouldn't be able to read the instructions on how to get to our meetings.

User avatar
ps56k
Posts: 856
Joined: Sat Mar 19, 2011 1:28 pm
Location: Chicago area

Re: Child's Roth

Post by ps56k » Tue Apr 15, 2014 10:45 pm

dickenjb wrote:Well I have my 20 year old in Vanguard TR2050 and the 17 year old in TR2055, so TR2060 for a 5 year old sounds about right.
I was curious about the AA and the yearly progression, so I looked at all the TR funds and their AA.
It is not linear, but rather broad steps or plateaus for chunks of time.
Used TR2050 for our 23yr old's Roth IRA.

...Total Stock - Intl Stock - Total Bond - Intl Bonds - Short Term TIPs
Inc - 21% - 9% - 39% - 14% - 17%
2010 - 36% - 12% - 28% - 12% - 13%
2015 - 37% - 16% - 32% - 9% - 6%

2020 - 44% - 18% - 30% - 8% (no TIPS used for these following funds)
2025 - 48% - 21% - 25% - 6%
2030 - 54% - 23% - 19% - 5%
2035 - 59% - 25% - 13% - 3%
2040 - 63% - 27% - 8% - 2%
2045 - 63% - 27% - 8% - 2%
2050 - 63% - 27% - 8% - 2%
2055 - 63% - 27% - 8% - 2%
2060 - 63% - 27% - 8% - 2%
Last edited by ps56k on Wed Apr 16, 2014 12:58 pm, edited 1 time in total.

HIinvestor
Posts: 1833
Joined: Tue Apr 08, 2014 3:23 am

Re: Child's Roth

Post by HIinvestor » Wed Apr 16, 2014 1:15 am

Just curious--did the short term TIPS drop out after 2020, because there are only 4 % numbers after 2015. I'm trying to understand the chart you posted. Thanks. Interesting to see how they calculate these things.

livesoft
Posts: 69629
Joined: Thu Mar 01, 2007 8:00 pm

Re: Child's Roth

Post by livesoft » Wed Apr 16, 2014 6:50 am

tovetove wrote:...
Oh! One thing I learned that I guess could be advice. You can't invest in your child's Roth every penny made because you have to subtract the amount of tax paid. So if your child makes 1000. You need to pay taxes on this, taxes would be under 200 but can use that as a ball park. You could then safely invest 800. in your child's Roth for that year. I almost had to pay a penalty but just stopped a monthly Roth payment instead. I don't know if that made sense. (I'm not an expert by any means)
That's not what I have heard. Whatever is in Box 1 of a W-2 (if they get a W-2) can be contributed to a Roth IRA up to the contribution limit of $5,500. And Box 1 is before taxes are taken out. And something similar for a 1099-MISC.

So I would be curious of why you wrote what you wrote. Source? Link? Thanks.
Wiki This signature message sponsored by sscritic: Learn to fish.

Topic Author
tovetove
Posts: 15
Joined: Mon Apr 14, 2014 4:34 pm

Re: Child's Roth

Post by tovetove » Wed Apr 16, 2014 7:48 am

livesoft wrote:
tovetove wrote:...
Oh! One thing I learned that I guess could be advice. You can't invest in your child's Roth every penny made because you have to subtract the amount of tax paid. So if your child makes 1000. You need to pay taxes on this, taxes would be under 200 but can use that as a ball park. You could then safely invest 800. in your child's Roth for that year. I almost had to pay a penalty but just stopped a monthly Roth payment instead. I don't know if that made sense. (I'm not an expert by any means)
That's not what I have heard. Whatever is in Box 1 of a W-2 (if they get a W-2) can be contributed to a Roth IRA up to the contribution limit of $5,500. And Box 1 is before taxes are taken out. And something similar for a 1099-MISC.

So I would be curious of why you wrote what you wrote. Source? Link? Thanks.
Hi! Yes I'll try to explain. I discovered this while doing my son's taxes with turbo tax. I filed him by himself the last two years, I needed to use something like turbo tax to guide me through mostly because we live in one state but he works in another. Anyway, while I was entering the amount he made and then entered the amount to be put in his Roth that year, a notice popped up that too much was put in his Roth. This was when I matched dollar for dollar. The amount they said I was over was the exact amount owed in taxes. Also a screen popped up that said something like "oh no! You put too much in your Roth this year, don't worry, we can help you pay the penalty".. I then lowered the amount invested in the Roth (because I hadn't yet invested the last few payments planned) So my understanding was that taxes owed dropped what he earned down a few hundred. Maybe I assumed wrong. But I'm saying I did have to fix it and when I did make this adjustment of putting a few hundred less into his Roth then it was accepted by turbo tax's computer auditing system. Hope this helps:)

dickenjb
Posts: 2941
Joined: Tue Jan 05, 2010 1:11 pm
Location: Philadelphia PA

Re: Child's Roth

Post by dickenjb » Wed Apr 16, 2014 8:01 am

tovetove is incorrect if it is W2 compensation - you get to put in the entire contents of Box 1 less Box 11, or $5500 whichever is less.

He is correct on 1099 compensation - the allowed contribution is compensation, less any business expenses, less 1/2 SE tax.

This puts the SE person on equal footing with W2 employee, since employer's share of FICA and Medicare comes out before Box 1 on the W2.

Topic Author
tovetove
Posts: 15
Joined: Mon Apr 14, 2014 4:34 pm

Re: Child's Roth

Post by tovetove » Wed Apr 16, 2014 8:10 am

It was/is a 1099.
I'm new here but already love this group.
I hope you don't mind if I stick around
Thank you! To everyone
~Tove

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Re: Child's Roth

Post by sscritic » Wed Apr 16, 2014 8:19 am

dickenjb wrote:tovetove is incorrect if it is W2 compensation - you get to put in the entire contents of Box 1 less Box 11, or $5500 whichever is less.

He is correct on 1099 compensation - the allowed contribution is compensation, less any business expenses, less 1/2 SE tax.

This puts the SE person on equal footing with W2 employee, since employer's share of FICA and Medicare comes out before Box 1 on the W2.
This makes sense, because a dependent child with $2000 of earned income will have a standard deduction of $2350 (in some years) and taxable income of zero, but will still owe the self-employment tax. In that case, the "amount owed in tax" is exactly the child's self-employment tax.

tovetotove could see if that is the case by looking at the actual forms instead of a TT screen.

dickenjb
Posts: 2941
Joined: Tue Jan 05, 2010 1:11 pm
Location: Philadelphia PA

Re: Child's Roth

Post by dickenjb » Wed Apr 16, 2014 8:20 am

tovetove wrote:It was/is a 1099.
I'm new here but already love this group.
I hope you don't mind if I stick around
Thank you! To everyone
~Tove
We would love you to stick around. It is a great community.

Turbo Tax will give you the correct answer, as does my CPA, but I like to understand the logic behind the calculation.

livesoft
Posts: 69629
Joined: Thu Mar 01, 2007 8:00 pm

Re: Child's Roth

Post by livesoft » Wed Apr 16, 2014 8:47 am

Thanks folks. I learned something without reading the IRS publications. :)
Wiki This signature message sponsored by sscritic: Learn to fish.

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Re: Child's Roth

Post by sscritic » Wed Apr 16, 2014 8:50 am

livesoft wrote:Thanks folks. I learned something without reading the IRS publications. :)
Only because someone else read them for you. :)

livesoft
Posts: 69629
Joined: Thu Mar 01, 2007 8:00 pm

Re: Child's Roth

Post by livesoft » Wed Apr 16, 2014 8:53 am

Yep, that's true and I didn't google anything either. Something's contagious around here.
Wiki This signature message sponsored by sscritic: Learn to fish.

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Re: Child's Roth

Post by sscritic » Wed Apr 16, 2014 8:59 am

livesoft wrote:Yep, that's true and I didn't google anything either. Something's contagious around here.
And here I was hoping that googling and reading were contagious, but clearly I am wrong in so many ways.

User avatar
ps56k
Posts: 856
Joined: Sat Mar 19, 2011 1:28 pm
Location: Chicago area

Re: Child's Roth

Post by ps56k » Wed Apr 16, 2014 1:01 pm

HIinvestor wrote:Just curious--did the short term TIPS drop out after 2015, because there are only 4 numbers after 2015. I'm trying to understand the chart you posted. Thanks. Interesting to see how they calculate these things.
yup - just checked - no TIPS used beyond 2015.
I went thru each Vanguard Target Retirement fund and listed the allocation holdings for that fund,
since I expected it to be linear - it wasn't what I expected.

Post Reply