Roth IRA and Kids

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brunjest
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Joined: Sat Oct 27, 2007 5:54 am

Roth IRA and Kids

Post by brunjest »

Has anyone created Roth IRAs for their kids from chore money?

We have 2 kids, 11 and 12, and would like to contribute to a Roth IRA on their behalf as soon as possible, to get them started and to help them learn about investing.

They earn money from household chores and such, and from other neighbors.

Does household chore money meet the earned income requirement? I see conflicting advice on the web.

Anyone else try this at Vanguard? How did you meet the minimums and what other record keeping did you do?
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Regal 56
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Post by Regal 56 »

As you noted, the question of earned income for children seems to be a grey area. From what I've seen, the general consensus is that any kind of payment for household chores, baby sitting, yard work, et cetera, would be considered earned income. But like you, I've never seen a definitive answer. IRS publication 590, which is about IRAs, doesn't address this question, and I can find nothing on the IRS web site.

You might try asking this question on the Benefits Link Forum. They have a forum specifically devoted to IRAs:
http://benefitslink.com/boards/index.ph ... owforum=18

And of course, you could always contact the IRS: (800) 829-1040.

Tom Poore
tomd37
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Roth IRA

Post by tomd37 »

I can't point to specific replies, but my memory of prior replies tells me that if a tax return is filed for the child listing the income and any supporting Schedule (if required) then a contribution to a Roth IRA is justified upon to the amount of the earned income or $4000, whichever is less.

My memory also tells me that the IRS has no real method of checking on this, but I would not like to be in a position many years down the road if the IRS starts looking into the matter (the gov't is always looking for money). The penalties and interest could be HUGE and certainly not worth the initial establishment of the Roth
Tom D.
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Vig Oren
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Post by Vig Oren »

From Kiplinger:

ASK KIM
Roth IRAs for Children
January 16, 2006

I was thinking about starting a Roth IRA for my young son. However, I was wondering if there are any restrictions, such as whether he has to earn the money.

That's a great idea. Investing in a Roth IRA for your child is an excellent way to give him a huge head start on saving for the future. But there's one big catch: The child needs to have earned income -- even if it's just from delivering newspapers, babysitting or mowing lawns (but not just from their regular allowance).

If your child is too young to earn money -- and hasn't started a career as a baby model -- then you'll need to find some other ways to save for now. Check out our ABCs of Saving for College for other savings ideas for young children.

But as soon as your son does earn money, opening a Roth IRA for him can be a very powerful way to save. He'll be able to invest the amount of his earned income, up to $4,000 in 2006, just like anyone else (the maximum increases every few years).

Make sure your child keeps records that list the date of each job, the person who paid him and how much he earned -- then keep the records in your tax files, just in case the IRS ever has questions.

He doesn't need to invest the actual money that he's earned himself -- most 12-year-olds would have a tough time understanding why everything they earned had to be set aside for the future. As long as he has a job, you can give him some money to invest in the account, as long as it doesn't exceed the limit.

Even investing just a little money in the account when he's young can make a big difference in the future. If you invest $2,000 when he's 12 in a Roth IRA and the investments earn 8% per year, that one contribution will grow to more than $$138,000 by the time he's 67 years old. Continue to invest just that much every year, and his account will grow to more than $1.8 million by retirement. Invest the maximum, now $4,000, and he'll have more than $3.6 million -- tax-free. What a great path to start your kid on.

Some IRA administrators give parents a tough time, though, when they try to open an IRA for their kids because minors can't legally enter into binding contracts. But most fund companies and brokerage firms just require an adult to co-sign the paperwork. Charles Schwab, Merrill Lynch, T.D. Waterhouse, Vanguard, T. Rowe Price, Dodge & Cox and Oakmark, for example, all allow kids to open Roth IRAs. For more information, see Roth IRA Rules for Kids. For investing ideas for very long-term savings, see our Kiplinger's fund portfolios.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ | "One of the greatest piece of economic wisdom is to know what you do not know"{John Galbraith}
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marbleous
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SS

Post by marbleous »

So if your minor kids start up their own babysitting or lawn care business (in order to fund a Roth), and since they are filing tax returns, do they also have to withhold and pay all their own FICA Social Security and Medicare taxes?

Does anybody know offhand what the earning limits are before they would have to do this?
tc33
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Post by tc33 »

I found this article interesting: A Sure-Fire Way to Turn your Kids into Tax Free Millionaires
http://www.steve-olson.com/a-sure-fire- ... lionaires/

Tom
buyza
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Post by buyza »

On a somewhat unrelated topic, is income made off investing qualified to be put in a roth ira? Or do I have to "put in hours" at the family firm.
sport
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Post by sport »

buyza wrote:On a somewhat unrelated topic, is income made off investing qualified to be put in a roth ira? Or do I have to "put in hours" at the family firm.
For an IRA, the requirement is Earned Income. Dividends, interest, and capital gains are not "earned".

Best wishes,
Jeff
Bigfoothunter
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Post by Bigfoothunter »

I have not done this as I did not feel I could justify any amounts for daughter as "earned income" so I will wait until she gets a part time job, and match her earnings and put in Roth IRA. I did take a little of a different angle, and set up an annuity for her at Vanguard in growth funds. It has done great, and will grow into a substantial amount, but she will need to pay taxes on withdrawal. I liked this approach as it may be protected from lawsuits and since I contributed her separate property and not applicable in any divorce proceedings (hopefully never happen). Just an alternative before earned income to get early compounding. I would only do with this Vanguard due to low fees for an annuity. Bigfoot
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Bounca
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Post by Bounca »

tc33 wrote:I found this article interesting: A Sure-Fire Way to Turn your Kids into Tax Free Millionaires
http://www.steve-olson.com/a-sure-fire- ... lionaires/

Tom
Assuming a 10% return (you could easily beat that)…

....hmmm
Indexfan
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Joined: Sun Sep 23, 2007 2:05 pm

I started a Roth IRA for my 17 year old

Post by Indexfan »

Daughter in T Rowe Price 2045 Retirement Fund in January.
When T Rowe opened their 2055 Retirement fund (TRRNX) in May, we exchanged into it as it is more appropriate for her young age.

Daughter has a part time GS-01 job as a cashier in local base commissary so the IRS can't question her income. I would worry about starting an IRA for a child with chore income as it is a questionable "Gray area" the IRS can later inquire about.

Price has a very low $50.00 per month intial funding fee for IRA's as long as it is deducted monthly from bank account.

So we started her IRA with the $50.00 minimum deposit per month from my Daughters credit union account. This year she will contribute $600 to her Roth.

The initial years of contributing to an IRA are SO IMPORTANT for young people to allow the power of time and investment return to build the IRA.

James
tc33
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Post by tc33 »

Bounca wrote: Assuming a 10% return (you could easily beat that)…

....hmmm
Agreed -- I certainly didn't care for that assumption either. OTOH, I found the strategy worth mentioning, as it describes the basics of setting up and funding a Roth IRA for one's youngins. I'm not a CPA (nor do I play one on the internet), so I can't vouch for the legality of such a strategy.

Tom
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