Roth IRA or Kids/Minors

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Mtmp8888
Posts: 14
Joined: Mon Jan 13, 2020 9:15 pm

Roth IRA or Kids/Minors

Post by Mtmp8888 » Tue Jan 14, 2020 9:28 pm

Anyone sets up Roth IRA account for your kids (minor)?

Does it really necessary for minor to receive W4?

What is your kid’s earned income come from washing neighbors’ cars or mowing neighbors’ lawns? I mean neighbors won’t issue W4 and pay cash.

Thoughts?

User avatar
Duckie
Posts: 7001
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Roth IRA or Kids/Minors

Post by Duckie » Tue Jan 14, 2020 9:46 pm

:wink: :)
Mtmp8888 wrote:Does it really necessary for minor to receive W4?

What is your kid’s earned income come from washing neighbors’ cars or mowing neighbors’ lawns? I mean neighbors won’t issue W4 and pay cash.
The kid doesn't need a W-2. He'd probably be considered an independent contractor not an employee. He could keep track of his earnings and expenses in a notebook. Then file Schedule C-EZ and Schedule SE with his Form 1040. His net earnings would qualify him for a Roth IRA.

User avatar
RickBoglehead
Posts: 5608
Joined: Wed Feb 14, 2018 9:10 am
Location: In a house

Re: Roth IRA or Kids/Minors

Post by RickBoglehead » Tue Jan 14, 2020 9:48 pm

And that doesn't qualify them for an IRA. This has been asked over and over on the forum. It is not a legitimate form of earned income for an IRA. They don't own a business.

https://www.irs.gov/credits-deductions/ ... ned-income
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

manatee2005
Posts: 249
Joined: Wed Dec 18, 2019 9:17 pm

Re: Roth IRA or Kids/Minors

Post by manatee2005 » Tue Jan 14, 2020 9:50 pm

RickBoglehead wrote:
Tue Jan 14, 2020 9:48 pm
And that doesn't qualify them for an IRA. This has been asked over and over on the forum. It is not a legitimate form of earned income for an IRA. They don't own a business.

https://www.irs.gov/credits-deductions/ ... ned-income
You're wrong. It's absolutely an income that's eligible for Roth IRA.

Royal Blue
Posts: 62
Joined: Wed Dec 18, 2019 4:07 pm

Re: Roth IRA or Kids/Minors

Post by Royal Blue » Tue Jan 14, 2020 9:57 pm

Deleted
Last edited by Royal Blue on Sat Jan 18, 2020 12:04 am, edited 2 times in total.

User avatar
RickBoglehead
Posts: 5608
Joined: Wed Feb 14, 2018 9:10 am
Location: In a house

Re: Roth IRA or Kids/Minors

Post by RickBoglehead » Tue Jan 14, 2020 10:01 pm

RickBoglehead wrote:
Tue Jan 14, 2020 9:48 pm
And that doesn't qualify them for an IRA. This has been asked over and over on the forum. It is not a legitimate form of earned income for an IRA. They don't own a business.

https://www.irs.gov/credits-deductions/ ... ned-income
Edit - I was responding to the OP's post which said nothing about recordkeeping nor filing taxes, if income warranted it. No money paid by parents to kids for chores counts. If the kid is running a legitimate business, keeping records, and filing a tax return if necessary, then they can open a Custodial IRA.

What BocaEli is doing is not allowed, paying for chores and counting as income.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

User avatar
Duckie
Posts: 7001
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Roth IRA or Kids/Minors

Post by Duckie » Tue Jan 14, 2020 10:07 pm

RickBoglehead wrote:They don't own a business.
He doesn't have to "own" a business. He just has to operate one. Washing cars, mowing lawns, shoveling snow, etc. are all little jobs people can do for money. He would be working for payment. Just because he's a minor doesn't mean it's not self-employment. If he were an adult and had cards or flyers stating:
  • _________Bill's Outside Chores
    Car washing - Lawn mowing - Snow shoveling
it would be considered a business. Being under age 18 doesn't make it NOT a business.

User avatar
RickBoglehead
Posts: 5608
Joined: Wed Feb 14, 2018 9:10 am
Location: In a house

Re: Roth IRA or Kids/Minors

Post by RickBoglehead » Tue Jan 14, 2020 10:08 pm

Duckie wrote:
Tue Jan 14, 2020 10:07 pm
RickBoglehead wrote:They don't own a business.
He doesn't have to "own" a business. He just has to operate one. Washing cars, mowing lawns, shoveling snow, etc. are all little jobs people can do for money. He would be working for payment. Just because he's a minor doesn't mean it's not self-employment. If he were an adult and had cards or flyers stating:
  • _________Bill's Outside Chores
    Car washing - Lawn mowing - Snow shoveling
it would be considered a business. Being under age 18 doesn't make it NOT a business.
Semantics. It is self employment income from their business.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

retire2022
Posts: 1033
Joined: Tue Oct 02, 2018 6:10 pm
Location: NYC

Re: Roth IRA or Kids/Minors

Post by retire2022 » Tue Jan 14, 2020 10:15 pm

op this was discussed in this thread regarding reporting for child IRA

viewtopic.php?f=1&t=267082

Katietsu
Posts: 2759
Joined: Sun Sep 22, 2013 1:48 am

Re: Roth IRA or Kids/Minors

Post by Katietsu » Tue Jan 14, 2020 10:22 pm

The OP stated that the paid job’s were for neighbors. This is OK to use for a Roth. Keep records. I would list the date, amount earned, who paid them, and what they were paid. This is the same information that I keep as an adult when I do jobs for my small side hustle. I would file a tax return for the child even if otherwise not required to do so.

The other conversation going on about a parent paying a kid for chores is a different discussion.

Spirit Rider
Posts: 12254
Joined: Fri Mar 02, 2007 2:39 pm

Re: Roth IRA or Kids/Minors

Post by Spirit Rider » Tue Jan 14, 2020 11:48 pm

I don't know why we have so many threads with the same misconceptions over and over again.
BocaEli wrote:
Tue Jan 14, 2020 9:57 pm
I opened Roth IRA's for my kids. I pay them for chores, getting homework done, allowance. Guess what? It adds up to $500 a month! :wink:

I set it up online via Fidelity. They don't ask for documentation.
Fidelity doesn't ask for documentation that you are eligible to make HSA contributions. That doesn't mean that is is legal for anyone to make HSA contributions because the custodian is not responsible for verification

Chores and homework are not employment and allowance is never compensation eligible for IRA contributions. Are you aware that there is no statute of limitations on excess IRA or HSA contributions. They are subject to a 6% excise tax penalty every year on the current excess contribution balance and interest accrues indefinitely.
Duckie wrote:
Tue Jan 14, 2020 10:07 pm
He doesn't have to "own" a business. He just has to operate one. Washing cars, mowing lawns, shoveling snow, etc. are all little jobs people can do for money. He would be working for payment. Just because he's a minor doesn't mean it's not self-employment. If he were an adult and had cards or flyers stating:
  • _________Bill's Outside Chores
    Car washing - Lawn mowing - Snow shoveling
it would be considered a business. Being under age 18 doesn't make it NOT a business.
While technically it is possible for a minor to be engaged in a trade or business. It is extremely rare under the facts and circumstances for a home owner to claim that the minor meets the Behavioral Control, Financial Control and Relationship of the Parties requirements to be classified as an independent contractor.

Not to mention, it makes absolutely no sense to surmount the overriding presumption that these types of task for homeowners are performed by household help. Why would you possibly want to pay 15.3% SE taxes, when household help < age 18 is not subject to FICA or unemployment insurance regardless of the amount earned from a single homeowner. Even if they are > age 18, household help earning < $2100 from a single homeowner is not subject to FICA and earnings < $1000/quarter is not subject to unemployment insurance.

You would have to be pretty dumb to report such income as self-employed income on Schedule C and pay 15.3% SE taxes. The only thing that is necessary is for the individual household help employer to file a W-2 if the wages are > $600/year. It is ~$5 from many online vendors. There is no need for the household help employer to run payroll if there are no FICA taxes and the employee does not specifically request withholding.

Royal Blue
Posts: 62
Joined: Wed Dec 18, 2019 4:07 pm

Re: Roth IRA or Kids/Minors

Post by Royal Blue » Wed Jan 15, 2020 12:08 am

Spirit Rider wrote:
Tue Jan 14, 2020 11:48 pm
I don't know why we have so many threads with the same misconceptions over and over again.
BocaEli wrote:
Tue Jan 14, 2020 9:57 pm
I opened Roth IRA's for my kids. I pay them for chores, getting homework done, allowance. Guess what? It adds up to $500 a month! :wink:

I set it up online via Fidelity. They don't ask for documentation.
Fidelity doesn't ask for documentation that you are eligible to make HSA contributions. That doesn't mean that is is legal for anyone to make HSA contributions because the custodian is not responsible for verification

Chores and homework are not employment and allowance is never compensation eligible for IRA contributions. Are you aware that there is no statute of limitations on excess IRA or HSA contributions. They are subject to a 6% excise tax penalty every year on the current excess contribution balance and interest accrues indefinitely.
[ quote fixed by admin LadyGeek]
—————

I guess they’ll have to get a modeling contract from one of my LLC’s, and negotiate an annual royalty for usage.

Topic Author
Mtmp8888
Posts: 14
Joined: Mon Jan 13, 2020 9:15 pm

Re: Roth IRA or Kids/Minors

Post by Mtmp8888 » Thu Jan 16, 2020 9:22 am

@retire2022 thanks for the link!

User avatar
LadyGeek
Site Admin
Posts: 58810
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Roth IRA or Kids/Minors

Post by LadyGeek » Thu Jan 16, 2020 10:05 am

I want to address several comments related to earned income. For the record, discussions of dishonest behavior or bypassing the law are totally unacceptable.

The intent is to understand how to do this within the existing legal framework; in which case this discussion can continue.

Everything is a matter of degree. The choice of using a tax deferred account, e.g. IRA, to avoid taxes during some period of time is one extreme, managing assets to qualify for Medicaid is the other. Gifting assets to avoid taxes is somewhere in the middle. The bottom line is to work within the legal framework. Ethics is the ever present elephant in the room.

The approach is to educate members on how to do things legally. State your points in a factual manner. If the intent strays from this objective, please report the post and we'll investigate.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

retire2022
Posts: 1033
Joined: Tue Oct 02, 2018 6:10 pm
Location: NYC

Re: Roth IRA or Kids/Minors

Post by retire2022 » Fri Jan 17, 2020 5:46 pm

Mtmp8888 wrote:
Thu Jan 16, 2020 9:22 am
@retire2022 thanks for the link!
Mtmp8888,

You're very welcomed

btw here is a link to free tax preparation software, at least you could have an idea, what the tax liability your child could owe.

https://sites.google.com/site/excel1040/home/download

User avatar
Nate79
Posts: 5327
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Roth IRA or Kids/Minors

Post by Nate79 » Fri Jan 17, 2020 5:54 pm

Royal Blue wrote:
Tue Jan 14, 2020 9:57 pm
I opened Roth IRA's for my kids. I pay them for chores, getting homework done, allowance. Guess what? It adds up to $500 a month! :wink:

I set it up online via Fidelity. They don't ask for documentation.
Your kids are going to have a massive mess some day. Good luck to them unwinding all of this.

retire2022
Posts: 1033
Joined: Tue Oct 02, 2018 6:10 pm
Location: NYC

Re: Roth IRA or Kids/Minors

Post by retire2022 » Fri Jan 17, 2020 6:00 pm

Nate79 wrote:
Fri Jan 17, 2020 5:54 pm

Your kids are going to have a massive mess some day. Good luck to them unwinding all of this.
Nate79

Or they will thank the parent for making them a millionaire, random walk, I'll say, and would had loved my parents to had done this.

Btw my friend did this in mid 1990s for his two sons, they are BOTH grateful I suggested this to their parents to had hire them as part-time workers. Both kids have 300K or so in their account as 37, & 31.

fatcharlie
Posts: 44
Joined: Wed Aug 06, 2014 11:25 am

Re: Roth IRA or Kids/Minors

Post by fatcharlie » Fri Jan 17, 2020 6:09 pm

My plan was to match their earnings and put that money into ROTH IRAs for them - they still get their incentive to work, we can get the tax advantages and the money is locked up for their retirement to some degree. Sounds legal, right?

User avatar
Nate79
Posts: 5327
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Roth IRA or Kids/Minors

Post by Nate79 » Fri Jan 17, 2020 6:24 pm

retire2022 wrote:
Fri Jan 17, 2020 6:00 pm
Nate79 wrote:
Fri Jan 17, 2020 5:54 pm

Your kids are going to have a massive mess some day. Good luck to them unwinding all of this.
Nate79

Or they will thank the parent for making them a millionaire, random walk, I'll say, and would had loved my parents to had done this.

Btw my friend did this in mid 1990s for his two sons, they are BOTH grateful I suggested this to their parents to had hire them as part-time workers. Both kids have 300K or so in their account as 37, & 31.
Do you mean after paying all the penalties and fees to fix the contributions that were contributed improperly? Promoting illegal activity on here is frowned upon even if it makes you kids a millionaire. Again referring to paying kids to do chores.

retire2022
Posts: 1033
Joined: Tue Oct 02, 2018 6:10 pm
Location: NYC

Re: Roth IRA or Kids/Minors

Post by retire2022 » Fri Jan 17, 2020 6:27 pm

Nate79 wrote:
Fri Jan 17, 2020 6:24 pm

Do you mean after paying all the penalties and fees to fix the contributions that were contributed improperly? Promoting illegal activity on here is frowned upon even if it makes you kids a millionaire. Again referring to paying kids to do chores.
While I cannot speak to on behalf of op and its intentions, nowhere on his original post the op is suggesting anything illegal. I think some people here are overly zealous on policing thoughts.

User avatar
Nate79
Posts: 5327
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Roth IRA or Kids/Minors

Post by Nate79 » Fri Jan 17, 2020 6:36 pm

retire2022 wrote:
Fri Jan 17, 2020 6:27 pm
Nate79 wrote:
Fri Jan 17, 2020 6:24 pm

Do you mean after paying all the penalties and fees to fix the contributions that were contributed improperly? Promoting illegal activity on here is frowned upon even if it makes you kids a millionaire. Again referring to paying kids to do chores.
While I cannot speak to on behalf of op and its intentions, nowhere on his original post the op is suggesting anything illegal. I think some people here are overly zealous on policing thoughts.
You quoted my post that was quoting another poster paying their kid for chores, not the OP. The OP is talking about their kids getting paid by their neighbors, not chores.

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

Re: Roth IRA or Kids/Minors

Post by rkhusky » Fri Jan 17, 2020 7:24 pm

fatcharlie wrote:
Fri Jan 17, 2020 6:09 pm
My plan was to match their earnings and put that money into ROTH IRAs for them - they still get their incentive to work, we can get the tax advantages and the money is locked up for their retirement to some degree. Sounds legal, right?
Perfectly legal as long as you are not paying for household chores or using allowance money and the job and pay rate is something that someone would normally pay someone to do. Best if it is someone other than the parents paying, unless they own a business and the job is part of the business.

Royal Blue
Posts: 62
Joined: Wed Dec 18, 2019 4:07 pm

Re: Roth IRA or Kids/Minors

Post by Royal Blue » Fri Jan 17, 2020 7:33 pm

Nate79 wrote:
Fri Jan 17, 2020 6:36 pm
retire2022 wrote:
Fri Jan 17, 2020 6:27 pm
Nate79 wrote:
Fri Jan 17, 2020 6:24 pm

Do you mean after paying all the penalties and fees to fix the contributions that were contributed improperly? Promoting illegal activity on here is frowned upon even if it makes you kids a millionaire. Again referring to paying kids to do chores.
While I cannot speak to on behalf of op and its intentions, nowhere on his original post the op is suggesting anything illegal. I think some people here are overly zealous on policing thoughts.
You quoted my post that was quoting another poster paying their kid for chores, not the OP. The OP is talking about their kids getting paid by their neighbors, not chores.

Nate - Thank you for your snide concern. It won't be a mess. I appreciate the feedback others have provided and have already started to put in action a funding method that will be abide by the rules.

User avatar
LadyGeek
Site Admin
Posts: 58810
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Roth IRA or Kids/Minors

Post by LadyGeek » Sat Jan 18, 2020 8:52 am

I removed a contentious post and reply. As a reminder, see: General Etiquette
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.

...At all times we must conduct ourselves in a respectful manner to other posters
.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Post Reply