Roth IRA for 13 yo kid

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
csmba
Posts: 6
Joined: Tue May 04, 2021 10:24 pm

Roth IRA for 13 yo kid

Post by csmba »

I keep getting conflicting answers so I though I will ask this community which surely has plenty of folks that actually did this and can tell me the real deal.

I want my kid to invest for educational purposes, I see 2 options:

1. Taxable custodial account
2. Roth IRA

Are these pros/cons correct? or is any of them "not really"?

Taxable custodial:
  • PROS: as long as I make sure there aren't more than 1K passive income, no need to file tax return for kid. so no complications tax wise
  • CON: will lower the kids collage financial support
any other pro/con?

Roth IRA:
  • PROS: not impact collage stuff, grow tax free, no worries about taxes since no passive income
  • CONS: kid need to "earn income" to contribute. If I pay them more than $400 for that year for earned income (take care of pet sitting paid by neighbors, or if I pay for household tasks like garden care) the kid must file taxes AND pay self employment tax at 15%
it feels like doing taxes is not worth it, and paying 15% tax is even less worth it.. thoughts? am I wrong on any of this? please tell me it is easy and I got bad advice.. thanks!
helloeveryone
Posts: 1283
Joined: Sun Sep 04, 2016 5:16 pm

Re: Roth IRA for 13 yo kid

Post by helloeveryone »

csmba wrote: Tue May 04, 2021 10:33 pm I keep getting conflicting answers so I though I will ask this community which surely has plenty of folks that actually did this and can tell me the real deal.

I want my kid to invest for educational purposes, I see 2 options:

1. Taxable custodial account
2. Roth IRA

Are these pros/cons correct? or is any of them "not really"?

Taxable custodial:
  • PROS: as long as I make sure there aren't more than 1K passive income, no need to file tax return for kid. so no complications tax wise
  • CON: will lower the kids collage financial support
any other pro/con?

Roth IRA:
  • PROS: not impact collage stuff, grow tax free, no worries about taxes since no passive income
  • CONS: kid need to "earn income" to contribute. If I pay them more than $400 for that year for earned income (take care of pet sitting paid by neighbors, or if I pay for household tasks like garden care) the kid must file taxes AND pay self employment tax at 15%
it feels like doing taxes is not worth it, and paying 15% tax is even less worth it.. thoughts? am I wrong on any of this? please tell me it is easy and I got bad advice.. thanks!

well not an answer to your questions but I opened a taxable account at vanguard for my 10yo and 11yo with $1000 in money from bdays, holidays etc... I used the VLXVX - Vanguard Target Retirement 2065 Fund because it was the only one that had minimum $1000 to open which is what they had saved up. Now when they receive any money I have them save 15-20% and try to teach them about stocks for long term growth, retirement planning, and compounding. Lessons I didn't get until adulthood. Hopefully it sticks but at least we're trying.

This will impact college stuff but we are high earners and have 529 for kids and won't qualify for financial aid (appropriately so)

I'm sure there are other downsides to this that i have not thought through.
pkcrafter
Posts: 15461
Joined: Sun Mar 04, 2007 11:19 am
Location: CA
Contact:

Re: Roth IRA for 13 yo kid

Post by pkcrafter »

When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
User avatar
TomatoTomahto
Posts: 17104
Joined: Mon Apr 11, 2011 1:48 pm

Re: Roth IRA for 13 yo kid

Post by TomatoTomahto »

helloeveryone wrote: Wed May 05, 2021 9:00 am CONS: kid need to "earn income" to contribute. If I pay them more than $400 for that year for earned income (take care of pet sitting paid by neighbors, or if I pay for household tasks like garden care) the kid must file taxes AND pay self employment tax at 15%
It’s not a good sign when you have to put “earn income” in quotes.

Don’t do it. Teach your 13 year old to obey the law. Kids learn by watching what we model more than they listen to us.

ETA: welcome to the forum, but please familiarize yourself with the rules here.
I get the FI part but not the RE part of FIRE.
sailaway
Posts: 8188
Joined: Fri May 12, 2017 1:11 pm

Re: Roth IRA for 13 yo kid

Post by sailaway »

If your kid is pet sitting and otherwise earning income as you describe, they should be filing taxes when required, whether they put the earnings into Roth or not.

If they don't have such earned income, then 529s and taxable accounts are going to be more appropriate.
nolesrule
Posts: 2631
Joined: Thu Feb 26, 2015 9:59 am

Re: Roth IRA for 13 yo kid

Post by nolesrule »

Getting paid for household tasks within your own household is not considered earned income.
Wash.Invest
Posts: 703
Joined: Sat Jun 13, 2009 1:25 am

Re: Roth IRA for 13 yo kid

Post by Wash.Invest »

Can be a good idea for a 14 YO to learn how to file (and pay) taxes... (and much other financial responsibility.

Keep it all above board, but certainly look to your kid's interest in the whole process. (Most like money and like to watch it grow).

We used Roth for kids.
Good idea to swap kids with the neighbors when it comes time for WORK! (They can Learn to listen and work and respond to other bosses than their parents :wink: )

I matched their earned income into Roths (up to cap) until kids left home (16-18).

I have seen 4H and farm kids make many thousands $$ / yr of personal earned income.
Thesaints
Posts: 5087
Joined: Tue Jun 20, 2017 12:25 am

Re: Roth IRA for 13 yo kid

Post by Thesaints »

Shouldn't you be paying SSA contributions on the "earned income" as well ?
lakpr
Posts: 11520
Joined: Fri Mar 18, 2011 9:59 am

Re: Roth IRA for 13 yo kid

Post by lakpr »

Thesaints wrote: Wed May 05, 2021 2:19 pm Shouldn't you be paying SSA contributions on the "earned income" as well ?
That's exactly where the 15% self-employment taxes that the OP referenced comes from.
User avatar
Wiggums
Posts: 7028
Joined: Thu Jan 31, 2019 7:02 am

Re: Roth IRA for 13 yo kid

Post by Wiggums »

The important thing to remember is that your child must have earned income during the year for which a contribution is made. Money from an allowance or investing income does not count as earned income and thus cannot be used towards contributions.

If the neighbor pays your child, I would think that you would need to keep records of date worked, work performed, amount received, etc. hardly seems worth it for a custodial account.
"I started with nothing and I still have most of it left."
Topic Author
csmba
Posts: 6
Joined: Tue May 04, 2021 10:24 pm

Re: Roth IRA for 13 yo kid

Post by csmba »

It’s not a good sign when you have to put “earn income” in quotes.
Thanks for checking and assuming good intents :-)
They are earning it and this is the point of me doing the research. It is totally legit to get paid by the neighbor to take care of their pets when they are on vacation, as IIUC from the reading I am doing, it is legit to pay as a parent for the kids to do yard work (which they do).

my question was about how to make sure I choose the best legal but also easy way to get this empowering done. I don't feel like spending money on CPA to figure out how to do a W2 return, and hence asking the community.
User avatar
retired@50
Posts: 12709
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Roth IRA for 13 yo kid

Post by retired@50 »

csmba wrote: Wed May 05, 2021 10:59 pm
It’s not a good sign when you have to put “earn income” in quotes.
Thanks for checking and assuming good intents :-)
They are earning it and this is the point of me doing the research. It is totally legit to get paid by the neighbor to take care of their pets when they are on vacation, as IIUC from the reading I am doing, it is legit to pay as a parent for the kids to do yard work (which they do).

my question was about how to make sure I choose the best legal but also easy way to get this empowering done. I don't feel like spending money on CPA to figure out how to do a W2 return, and hence asking the community.
Would you care to share a link to the reading you are doing?

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Oregon Beancounter
Posts: 27
Joined: Wed May 16, 2018 5:35 pm

Re: Roth IRA for 13 yo kid

Post by Oregon Beancounter »

I know you are allergic to using a tax professional. Paying your kids opens up issues. Possibility of a household employee status. Workmen’s compensation insurance. Federal and state unemployment taxes.

A career in public accounting has allowed me to see unintended consequences to play out. In expensive ways.
reader79
Posts: 98
Joined: Fri Jan 15, 2021 11:42 pm

Re: Roth IRA for 13 yo kid

Post by reader79 »

My kids don't have taxable earned income yet (they're 6 and 4), but we wanted to include investing in our weekly family money lessons. So, we opened up UTMA accounts for both of them and dollar-cost average a portion of their chore money into an SP500 index fund every month. We also do a family matching program for these savings to teach the kids to take advantage of matching programs. Once they're older and earn taxable income, we will have a matching program where we will gift them a dollar-for-dollar match on their after-tax Roth IRA contributions up to the annual contribution. The idea is to teach them from a young age that consistency and patience are their investing superpowers.

We will cover their college through 529 accounts. They won't qualify for any financial.
VTI: 50%, QQQM: 30%, VO: 10%, VB: 10%
User avatar
illumination
Posts: 3160
Joined: Tue Apr 02, 2019 6:13 pm

Re: Roth IRA for 13 yo kid

Post by illumination »

The UTMA route is "cleaner", you can tax gain harvest up to $2,000 tax-free every year. That really adds up to where it could be a good sized balance over time. If you owe some level of taxes going the Roth IRA path, it could actually mean the UTMA has a higher total balance by the time he turns 18.

If your child does the Roth path, you'd likely have to pay some sort of income tax every year in order to claim it as earned income. I have heard there is something of a loophole where you can pay a member of your household and not have to collect a payroll tax, but you'll have to do some searching.
I also would be concerned about pushback from the IRS when a young-ish kid has a Roth IRA and the qualifications look phony (even if they are indeed legit).
User avatar
Brianmcg321
Posts: 1874
Joined: Mon Jul 15, 2019 8:23 am

Re: Roth IRA for 13 yo kid

Post by Brianmcg321 »

He will have to start filing taxes in order to have "earned income".
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
Grt2bOutdoors
Posts: 25617
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Roth IRA for 13 yo kid

Post by Grt2bOutdoors »

Put it in a UTMA - not because the college police are going to confiscate it - they might, but your kid might want to use all of the money before then to go on a special vacation or to buy their first car, or to just learn about investing. A 13 year old kid just needs to learn the basics, ROTH is nice but think back to when you were 13, were you thinking about retirement or were you thinking about that new something you wanted but had no money for or better yet you were just thinking about upcoming summer vacation?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Topic Author
csmba
Posts: 6
Joined: Tue May 04, 2021 10:24 pm

Re: Roth IRA for 13 yo kid

Post by csmba »

Oregon Beancounter wrote: Thu May 06, 2021 12:25 am I know you are allergic to using a tax professional.
not at all, I pay over $700 a year for my CPA to do my taxes... but I don't want to pay more to the CPA than my kid is making from his little investment.
Topic Author
csmba
Posts: 6
Joined: Tue May 04, 2021 10:24 pm

Re: Roth IRA for 13 yo kid

Post by csmba »

illumination wrote: Thu May 06, 2021 10:30 am The UTMA route is "cleaner", you can tax gain harvest up to $2,000 tax-free every year. That really adds up to where it could be a good sized balance over time. If you owe some level of taxes going the Roth IRA path, it could actually mean the UTMA has a higher total balance by the time he turns 18.
Thanks! so as long as the passive income is less than 2K, you do nothing in terms of having to do end of year taxes? neither fill in taxes for them nor need to make any changes in your own?
User avatar
rob
Posts: 5236
Joined: Mon Feb 19, 2007 5:49 pm
Location: Here

Re: Roth IRA for 13 yo kid

Post by rob »

Here we go again.... What about earned income is hard to understand..... Unless your kid is earning income outside the house, it's not earned income. Do lots of people get away with this... sure. Does that make it legal... nope.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
Bmac
Posts: 519
Joined: Sun Mar 03, 2013 7:58 am
Location: Seattle

Re: Roth IRA for 13 yo kid

Post by Bmac »

We started 529s when each of our two daughters were born. Subsequently UTMAs. Finally, when our older daughter got her first actual part time, W2 paying job, we opened a Roth account and matched her earnings. Just wait a few years until the kids are scooping ice cream or bagging groceries.
Jimsad
Posts: 903
Joined: Mon Mar 20, 2017 5:54 pm

Re: Roth IRA for 13 yo kid

Post by Jimsad »

My teenage kids are on payroll for my business and work 3-6 hours per week
They are paid minimum wage and my accountant files taxes for them every year
They both have Roth IRAs to put their income into
User avatar
dodecahedron
Posts: 6563
Joined: Tue Nov 12, 2013 11:28 am

Re: Roth IRA for 13 yo kid

Post by dodecahedron »

Brianmcg321 wrote: Thu May 06, 2021 10:34 am He will have to start filing taxes in order to have "earned income".
Not necessarily. A dependent child can potentially earn up to $12,400 in what the IRS defines as "earned income" without necessarily triggering a filing requirement.

If the earned income is considered "self-employment" income, he will have a filing requirement with as little as $400 in self-employment net income.

But if he is an employee and paid on a W-2, he can earn up to $12,400 before filing a federal return is required. So if he can find someone to hire him as an employee, he can have quite a bit of earned income and may not need to file a tax return. (He will, of course, have to fill out a W-4 for his employer but if income is low enough to rule out a filing requirement, he can have withholding exempted and set to zero.)

That said, at least in my state (NY, which is one of the more stringent states), a child under 14 can't get working papers to permit working in most jobs. There are exceptions (e.g., child models and performers, work on a family farm or business,babysitting, lawn mowing, newspaper delivery.)

Also, the child may have a *state* tax filing requirement at lower incomes. (E.g., in NY, he would have a state tax filing requirement and state tax liability with as little as $3,000 in income.)
livesoft
Posts: 85972
Joined: Thu Mar 01, 2007 7:00 pm

Re: Roth IRA for 13 yo kid

Post by livesoft »

Jimsad wrote: Sat May 08, 2021 5:48 am My teenage kids are on payroll for my business and work 3-6 hours per week
They are paid minimum wage and my accountant files taxes for them every year
They both have Roth IRAs to put their income into
May I ask about the tax savings versus cost of doing this? I understand that your employees are a business expense and reduce your own taxes. I assume that your children do not really pay taxes because their incomes are so low.

Another perspective:

I would guess that it would be simpler to save and invest money in my own accounts, then gift the purchased shares to children when they are no longer minors, say at age 18 and to continue gifting each year as long as one wanted. That is a "'Mom' Roth" would work just as well and be very simple.

I recently reviewed a tax return where someone had less than $500 of taxable income, but paid more than $700 to have their taxes done when they could have done their simple tax return themselves.
Wiki This signature message sponsored by sscritic: Learn to fish.
Jimsad
Posts: 903
Joined: Mon Mar 20, 2017 5:54 pm

Re: Roth IRA for 13 yo kid

Post by Jimsad »

My accountant does not charge extra for that
as she does our business and individual taxes already
User avatar
LadyGeek
Site Admin
Posts: 95466
Joined: Sat Dec 20, 2008 4:34 pm
Location: Philadelphia
Contact:

Re: Roth IRA for 13 yo kid

Post by LadyGeek »

I want to address several comments related to taxable income for a minor. 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.
Jimsad
Posts: 903
Joined: Mon Mar 20, 2017 5:54 pm

Re: Roth IRA for 13 yo kid

Post by Jimsad »

Actually checked with my accountant again
“No need to file tax return based on their low wages “
Topic Author
csmba
Posts: 6
Joined: Tue May 04, 2021 10:24 pm

Re: Roth IRA for 13 yo kid

Post by csmba »

Jimsad wrote: Sat May 08, 2021 6:32 am My accountant does not charge extra for that
as she does our business and individual taxes already
well I have no business, but do you like you accountant? can they do remote ? DM me if you do, looking for "second opinion" CPA.
Post Reply