Can a teen's cash income fund a Roth ?

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Lafder
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Can a teen's cash income fund a Roth ?

Post by Lafder »

If my teenager has made money babysitting, house and petsitting, can it be used to fund a Roth ?

It is cash income, with no W2 or other documentation of income. It is hundreds of dollars max from any one "employer"

lafder
Rainmaker41
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Re: Can a teen's cash income fund a Roth ?

Post by Rainmaker41 »

I don't see why not. It is earned income, although probably self-employment income. If the teen is 18 or older, and they file (and pay, including the employer portion of FICA) taxes based that self-employment income, then they have earned income that can be contributed to a Roth. If they are 17 or younger for the tax year it is more complicated and I don't know the answer.

Check the rules and see what more knowledgeable people say.
sterlingcooper05
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Re: Can a teen's cash income fund a Roth ?

Post by sterlingcooper05 »

you can file a return and self report the income, then fund the roth up to the amount that is reported.
mhalley
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Re: Can a teen's cash income fund a Roth ?

Post by mhalley »

They would need to keep records, don't need to have a w2. There is a special website devoted to minor iras:
http://irakids.com/ Lots of great info there. Started by a 16 yo!
Excerpt about record keeping:
It is very important for kids to keep track of their earned income. This information should include dates work was performed, the type of work, for whom it was done, and the amount earned. These records should be kept for seven years -- just in case the Internal Revenue Service (IRS) should ever question the kids' right to open and fund a Roth IRA.

Whether or not a kid has to file and pay taxes, these records are essential for documenting his or her earned income -- and the right to fund a Roth IRA.

Inexpensive accordian storage folder with cover flap.
Records can be kept either in paper form or as an electronic spreadsheet. In both cases, paper copies (and backup documentation, if any) should be filed/saved in a safe place.

One easy way to keep track of records is to file and store them in an "accordian" folder with a lid flap (to keep papers in and dust out). Folders like this cost about $5 to $7, and are widely available. Then the folder can be stored on a closet shelf, in a dresser drawer, or under the bed.

Schwab has the lowest minimums regarding minor roths I believe. http://www.schwab.com/public/schwab/inv ... todial_ira
golfallday
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Re: Can a teen's cash income fund a Roth ?

Post by golfallday »

Great post by mhalley!! Documentation of the income is key here especially if it's cash. When; who paid it with specifics; for what sort of job. Also check out IRS website for more info. A Custodial Roth IRA can be opened at Schwab where you can invest in a Total US Stock Index or SP500 Index with a .09% expense ratio. You can get started with a $100 investment; subsequent investment minimum is only $1.
Topic Author
Lafder
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Re: Can a teen's cash income fund a Roth ?

Post by Lafder »

Thanks, I will read more.

They are 15 and 17.

It is a scattering of payments ranging from 20$ to 200$ per job. No single big payment.

I have not even asked or told my kids yet. It just occurred to me it would be a good idea to consider if not too complicated to do, legally of course.

lafder
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BolderBoy
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Re: Can a teen's cash income fund a Roth ?

Post by BolderBoy »

Lafder wrote:If my teenager has made money babysitting, house and petsitting, can it be used to fund a Roth ?

It is cash income, with no W2 or other documentation of income. It is hundreds of dollars max from any one "employer"

lafder
Funding an IRA of any sort requires 'earned income'. The IRS looks at 'earned income' as any income on which FICA and MC taxes were paid. If she is willing to consider herself a sole proprietor and file a Schedule C...
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LadyGeek
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Re: Can a teen's cash income fund a Roth ?

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (Roth IRA).

As BolderBoy states, you need earned income. Go to the source: Publication 590-A (2015), Contributions to Individual Retirement Arrangements (IRAs), then follow the links under "Can You Contribute to a Roth IRA?" and "What Is Compensation?".
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GerryL
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Re: Can a teen's cash income fund a Roth ?

Post by GerryL »

If it is too complicated to get their earnings into a Roth, now would be a good time to instill in them the idea that they should be setting aside 20% of their earnings for their future selves.
BanditKing
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Re: Can a teen's cash income fund a Roth ?

Post by BanditKing »

They could give you their "investment" savings and you could place it into a 529 for them. You might even be able to take a deduction on the contribution depending on the state (here in WI, we wash my wife's tuition through her 529 just to take the deduction - in and out in 10 days - amounts to a few hundred bucks come tax filing time).

Definitely instill in them the "always save 15-20% of net income" practice. That, more than anything, will let them be set in later life. I wish I had been given that lesson as a kid (as well as any decent personal finance education, for that matter).
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