Roth IRA for teen

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leftcoaster
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Roth IRA for teen

Post by leftcoaster » Sun Feb 05, 2017 3:12 am

My teen has some irregular income from babysitting and I'd like to match her earnings in the form of a Roth IRA contribution.

There's no 1099 or W-2 for babysitting that I can use for a tax return for her. I assume I use schedule C. Payments are in cash - how do people in this situation assemble satisfactory records for the income?

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munemaker
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Re: Roth IRA for teen

Post by munemaker » Sun Feb 05, 2017 8:37 am

leftcoaster wrote:My teen has some irregular income from babysitting and I'd like to match her earnings in the form of a Roth IRA contribution.

There's no 1099 or W-2 for babysitting that I can use for a tax return for her. I assume I use schedule C. Payments are in cash - how do people in this situation assemble satisfactory records for the income?
We had Roths for our kids when they were minors. Not sure if this is still true, but we had a tough time finding a custodian that would open IRAs for minors. We ended up using S&P500 fund at Wells Fargo.

livesoft
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Re: Roth IRA for teen

Post by livesoft » Sun Feb 05, 2017 8:56 am

You know this will not be a lot of money in the grand scheme of things unless your daughter babysits celebrities' children during the summers full-time.

I suggest you set up a "fake Roth" account owned by you with the intent to just contribute to your child's Roth IRA when they are 18 or older. You can give her all the earnings, etc, and explain to her whatever you want to about it. The difference in taxes and outcome will probably be less than the cost of a family dinner.

My kids had Roth IRAs that I funded, but they started them when they were 18. My kids had UTMA accounts started by their grandmother which turned out to be a PITA.
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chw
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Re: Roth IRA for teen

Post by chw » Sun Feb 05, 2017 8:57 am

You cam do this with an adult as custodian (assuming teen is a minor). Vanguard did this for my children, though I believe minimum opening account was $3,000.

Not sure about rules on opening a Roth using income that is not reportable though. Beyond my level of expertise. My children used reportable W-2 income as basis for opening Roths.

clydewolf
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Re: Roth IRA for teen

Post by clydewolf » Sun Feb 05, 2017 9:57 am

The income could be reported on schedule C or C-EZ. Then there may also be FICA taxes due too.

I like Livesoft's suggestion.

livesoft
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Re: Roth IRA for teen

Post by livesoft » Sun Feb 05, 2017 10:07 am

And one can start a non-Roth UTMA for them. They can cash in the UTMA and contribute the money to their Roth when they are 18 and have some earned income. It is unlikely that the UTMA will generate any taxable income, so that it will in effect be very Roth-like.
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pshonore
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Re: Roth IRA for teen

Post by pshonore » Sun Feb 05, 2017 10:26 am

I think TD Ameritrade will open a Roth for as little as $100. File a Sched C, pay the SS tax, etc. As far as records go, just keep a log of dates when she earned the money, who paid it, etc. Think the Roth contribution will be limited to earnings - 1/2 SS paid

TVBogle
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Re: Roth IRA for teen

Post by TVBogle » Sun Feb 05, 2017 10:45 am

chw wrote:...Vanguard did this for my children, though I believe minimum opening account was $3,000...
Minimum investment for a Vanguard Target Retirement fund is $1000.

chipperd
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Re: Roth IRA for teen

Post by chipperd » Sun Feb 05, 2017 11:11 am

My son, at 13, was a soccer ref for a few years. Opened a custodial roth for him at Schwab ($100 minimum). He did the research on the funds and picked the total stock market index (ER: .09).
Good luck
Chipperd

Phil DeMuth
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Re: Roth IRA for teen

Post by Phil DeMuth » Sun Feb 05, 2017 12:15 pm

Do this. Vanguard doesn't want your business, but Schwab does.

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FiveK
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Re: Roth IRA for teen

Post by FiveK » Sun Feb 05, 2017 3:11 pm

If I read Where to start a child's Roth IRA with very low income? correctly, you can get in for $100 at Fidelity, Schwab, or Vanguard

Spirit Rider
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Re: Roth IRA for teen

Post by Spirit Rider » Sun Feb 05, 2017 3:49 pm

She could file a Schedule C. There would be no SE tax on < $400 / 0.9235 ~= $433/year. There would be no taxable income up to the standard deduction.

I also like Livesoft's idea.

Another option is that a minor >= 16 can open a MyRA account with no minimum balance and no minimum contribution. This might be a way of building up a minimum necessary elsewhere.

billfromct
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Re: Roth IRA for teen

Post by billfromct » Sun Feb 05, 2017 4:01 pm

I opened up a Roth IRA for both of my kids for their first after school job at age 16 with Vanguard about 10 years ago.

I don't remember having any problems opening the 2 Roth IRA accounts.

bill

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celia
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Re: Roth IRA for teen

Post by celia » Mon Feb 06, 2017 3:19 am

If she has self-employment income < $5,500 and reports it, she won't be able to contribute the total amount earned. The amount representing the EMPLOYER'S FICA can't be contributed.

I would just invest it at the Bank of Mom and Dad until she is no longer a dependent. Agree to some terms with her, have her write it up and both of you sign it, then have her keep the records of how it grows, along with further "contributions" and withdrawals.

Constant Chaos
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Re: Roth IRA for teen

Post by Constant Chaos » Mon Feb 06, 2017 7:35 am

My teenager got his first job last year and I opened a custodial Roth IRA for him at Schwab. very, very easy to do. As others mentioned, low minimum of $100 to open and he invests in the cheapest Target Index Retirement funds on the market, ER .13

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ebotrd
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Re: Roth IRA for teen

Post by ebotrd » Sat Apr 15, 2017 2:46 pm

I'm dealing with this now too. Maybe my example could help others, and I'd appreciate any comments on whether I have this right.

There is definitely some hassle involved, so I loved livesoft's idea (so much simpler). But in my case, my 14yo made $5910 babysitting and other odd jobs (no W2 or 1099) for 2016, so I want to do the daddy match to max out a Roth for her. I think with livesoft's way of simplifying is meant for folks that are just trying to contribute a few hundred bucks to a kid's IRA.

My understanding is that my daughter normally wouldn't need to pay income tax per se, since her 2016 income's under the $6,300(?) standard deduction. So I guess if we weren't trying to fund an IRA for her we could just skip the whole mess and get a way with it...no one would care, even if the IRS did notice it.

However, all earthlings are supposed to file for any earned income...and particularly since she's opening a Roth, she needs to file to (1) document the earned income, (2) document the Roth contribution, and (3) pay social security and Medicare withholding. Since her work would best be characterized as self-employed income, my understanding is it'd be categorized under the business income category of most tax software(?). Running it through TaxAct online, she'll need to pay $836 federal tax owed (14.15%), and a few bucks for state tax. It produced a 1040 (with the $5910 on lines 12 & 22) and Schedules C-EZ and SE. So, that sucks, but I guess that way not only are we complying with tax law and can rest assured her Roth's legit, but (don't laugh) she'll also get the maximum 4 social security credits allowed ($1260 x 4 = $5040 I guess?)..yipee! Plus I'm also very pleased with her entrepreneurial spirit and work ethic, and figure it's more likely her financial future will be set up nicely.

I guess livesoft's saying invest the money myself, but just mentally compartmentalize it to gift it to her Roth when she's older and has a real job(?) But, assuming one is able to and desires to max their Roth every year, the benefit of contributing those years would be lost.
Last edited by ebotrd on Sat Apr 15, 2017 3:17 pm, edited 2 times in total.
When something is important enough, you do it even if the odds are not in your favor. -- E. Musk.

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FiveK
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Re: Roth IRA for teen

Post by FiveK » Sat Apr 15, 2017 3:01 pm

ebotrd wrote:...assuming one is able to and desires to max their Roth every year, the benefit of contributing those years would be lost.
Yes.

Starting a custodial IRA for your daughter seems a great idea - well done to you both!

pshonore
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Re: Roth IRA for teen

Post by pshonore » Sat Apr 15, 2017 3:23 pm

ebotrd wrote:I'm dealing with this now too. Maybe my example could help others, and I'd appreciate any comments on whether I have this right.

There is definitely some hassle involved, so I loved livesoft's idea (so much simpler). But in my case, my 14yo made $5910 babysitting and other odd jobs (no W2 or 1099) for 2016, so I want to do the daddy match to max out a Roth for her. I think with livesoft's way of simplifying is meant for folks that are just trying to contribute a few hundred bucks to a kid's IRA.

My understanding is that my daughter normally wouldn't need to pay income tax per se, since her 2016 income's under the $6,300(?) standard deduction. So I guess if we weren't trying to fund an IRA for her we could just skip the whole mess and get a way with it...no one would care, even if the IRS did notice it.

However, all earthlings are supposed to file for any earned income...and particularly since she's opening a Roth, she needs to file to (1) document the earned income, (2) document the Roth contribution, and (3) pay social security and Medicare withholding. Since her work would best be characterized as self-employed income, my understanding is it'd be categorized under the business income category of most tax software(?). Running it through TaxAct online, she'll need to pay $836 federal tax owed (14.15%), and a few bucks for state tax. So, that sucks, but I guess that way not only are we complying with tax law and can rest assured her Roth's legit, but (don't laugh) she'll also get the maximum 4 social security credits allowed ($1260 x 4 = $5040 I guess?)..yipee! Plus I'm also very pleased with her entrepreneurial spirit and work ethic, and figure it's more likely her financial future will be set up nicely.

I guess livesoft's saying invest the money myself, but just mentally compartmentalize it to gift it to her Roth when she's older and has a real job(?) But, assuming one is able to and desires to max their Roth every year, the benefit of contributing those years would be lost.
Hopefully not more 2K came from one "employer", otherwise the "nanny tax" may come into play. Would not affect your daughter and the Roth, etc but it could affect the "employer".

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ebotrd
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Re: Roth IRA for teen

Post by ebotrd » Sat Apr 15, 2017 3:34 pm

Good point, pshonore. I noticed some mention of the nanny tax. She babysits for I think 9 families. The one family hired her 20 times, but that was still under $1,000 for the year, so I guess she's ok.
When something is important enough, you do it even if the odds are not in your favor. -- E. Musk.

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ebotrd
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Re: Roth IRA for teen

Post by ebotrd » Sat Apr 15, 2017 7:21 pm

Sorry -- still reading up on this.
Actually, some of the instructions I've read seem to say she'd best be categorized as a household employee (with 9 employers?). But I guess since all told she made well over $400, the IRS would want the Schedule SE. Also, the tax filing puts it this way for household employees:
"Enter any wages received as a household employee for which you did not receive a W-2 form because your employer paid you less than $2,000 in 2016."
If we enter her full earnings there it produces a warning:
"You have entered an amount equal to or greater than $2,000 for household employee income. If you received $2,000 or more from one household employer, you should have received a Form W-2. Please review your entries."

Each of her individual "employers" paid well under that amount and there were no W2's happening. I wouldn't want to cause any hassle for the parents, and don't even think an audit would be worth my time for $800 bucks. But I do have my doubts that she'll get much value decades from now from having paid FICA, so wouldn't want her to pay it if not required.
When something is important enough, you do it even if the odds are not in your favor. -- E. Musk.

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Alexa9
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Re: Roth IRA for teen

Post by Alexa9 » Sat Apr 15, 2017 7:44 pm

An alternative is the college IRA: it might be easier to contribute to a 529 or ESA for college.

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ebotrd
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Re: Roth IRA for teen

Post by ebotrd » Sat Apr 15, 2017 10:59 pm

I think we're good on the 529. This would be for something later like a down payment on a house or beyond.
When something is important enough, you do it even if the odds are not in your favor. -- E. Musk.

JGoneRiding
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Re: Roth IRA for teen

Post by JGoneRiding » Mon Apr 17, 2017 9:14 am

Phil DeMuth wrote:Do this. Vanguard doesn't want your business, but Schwab does.
AND in addition to only $100 min schwab now has the lowest s&p 500 index fund exp ratio!!! Only .03% they are specifically advertising that they beat Vanguard.

Indigorain
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Re: Roth IRA for teen

Post by Indigorain » Mon Apr 17, 2017 9:38 am

ebotrd wrote:Sorry -- still reading up on this.
Actually, some of the instructions I've read seem to say she'd best be categorized as a household employee (with 9 employers?). But I guess since all told she made well over $400, the IRS would want the Schedule SE. Also, the tax filing puts it this way for household employees:

Each of her individual "employers" paid well under that amount and there were no W2's happening. I wouldn't want to cause any hassle for the parents, and don't even think an audit would be worth my time for $800 bucks. But I do have my doubts that she'll get much value decades from now from having paid FICA, so wouldn't want her to pay it if not required.
It's not required, and you won't get anyone in trouble. Since she is under 18, and a student (l'm assuming this is the case) and working as a household employee, not self employed, she is exempt from the "nanny tax" rules. See this publication, under "wages not counted" https://www.irs.gov/publications/p926/a ... k100086722

Spirit Rider
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Re: Roth IRA for teen

Post by Spirit Rider » Mon Apr 17, 2017 11:42 am

You are confusing two issues here. She is most likely not a household employee with nine different clients and $800 in revenue.

However, if she is not a household employee, then she is a self-employed individual subject to SE tax. The Roth contribution is a separate issue.

She is either one or the other, she can not be neither. She was either supposed to be paid on a W-2 by nine employers or she needs to file a Schedule C and a Schedule SE and pay the SE tax. Whether she gets value from paying the SE tax or not is irrelevant.

MrNewEngland
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Re: Roth IRA for teen

Post by MrNewEngland » Mon Apr 17, 2017 2:58 pm

I'm very interested in this topic because I am planning on doing this for my nephew in a few years.

AnnieK
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Re: Roth IRA for teen

Post by AnnieK » Mon Apr 17, 2017 4:09 pm

I have Roth's for each of my nieces at Fidelity. Each has only a few hundred dollars and they are invested in the ITOT ETF.

dlw322
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Re: Roth IRA for teen

Post by dlw322 » Fri Jan 05, 2018 6:52 am

chipperd wrote:
Sun Feb 05, 2017 11:11 am
My son, at 13, was a soccer ref for a few years. Opened a custodial roth for him at Schwab ($100 minimum). He did the research on the funds and picked the total stock market index (ER: .09).
Good luck
Chipperd
this is similar to my situation. My son umped baseball. He earned <$400. How did you file his taxes. Did he owe SE taxes?

chipperd
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Re: Roth IRA for teen

Post by chipperd » Fri Jan 05, 2018 7:29 am

dlw322 wrote:
Fri Jan 05, 2018 6:52 am
chipperd wrote:
Sun Feb 05, 2017 11:11 am
My son, at 13, was a soccer ref for a few years. Opened a custodial roth for him at Schwab ($100 minimum). He did the research on the funds and picked the total stock market index (ER: .09).
Good luck
Chipperd
this is similar to my situation. My son umped baseball. He earned <$400. How did you file his taxes. Did he owe SE taxes?
No, he didn't. He didn't receive a 1099 or w-2.

Spirit Rider
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Re: Roth IRA for teen

Post by Spirit Rider » Fri Jan 05, 2018 10:35 am

Right answer for the wrong reason. It was taxable income regardless if a 1099 or W-2 was received.

If it was (self-employment income * 92.35) >= $400. A Form 1040, Schedule C, Schedule SE and the payment of SE taxes would be required. For example, this would be required if he received $300 SE income from two separate leagues. He would not receive a 1099, because it is not required < $600.

Even if this was employment; a W-2 is not required < $600, no FICA < $3K and no FUTA < $1K/quarter. A Form 1040 would not be required unless there was withholding to get refunded or there was tax liability, because total income >= standard deduction.

Note: There would be one other case where this income would have to be reported. If he had > $350 in unearned income, this would qualify as earned income and trigger the Kiddie Tax rules.

dlw322
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Re: Roth IRA for teen

Post by dlw322 » Fri Jan 05, 2018 11:43 am

I understand because he earned < $400 he doesn't have to file. I opened a Roth IRA for him for the full amount of his earned income. I made a copy of the check and will keep that in case there are questions later on.

Should I file a return for him though to document the earnings and Roth contribution.

Spirit Rider
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Re: Roth IRA for teen

Post by Spirit Rider » Fri Jan 05, 2018 2:44 pm

All that is necessary is documentation of the compensation for the Roth contributions. You already have that.

In fact. when I had my oldest girl file a return that was not required to justify a Roth contribution, the IRS sent a notice. Paraphrasing; "It was not required, do not do that again."

There is nowhere on a tax return to report a Roth IRA contribution unless you are using it to take the Saver's Credit.

pshonore
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Re: Roth IRA for teen

Post by pshonore » Fri Jan 05, 2018 3:26 pm

dlw322 wrote:
Fri Jan 05, 2018 11:43 am
I understand because he earned < $400 he doesn't have to file. I opened a Roth IRA for him for the full amount of his earned income. I made a copy of the check and will keep that in case there are questions later on.

Should I file a return for him though to document the earnings and Roth contribution.
A check made out to him proves little unless there is something attached explaining the payment (doubtful for a Soccer club) ; regardless of the IRS warning I would file a return and be done with it. I remember about 10 years ago, there was some kind of a telephone tax rebate that every household was entitled to, regardless of whether you needed to file a return. I recall filing a lot of returns for folks collecting SS and no other income and therefore no tax liability. A free $40 or so as I recall. No one complained.

dlw322
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Re: Roth IRA for teen

Post by dlw322 » Fri Jan 05, 2018 7:38 pm

pshonore wrote:
Fri Jan 05, 2018 3:26 pm
dlw322 wrote:
Fri Jan 05, 2018 11:43 am
I understand because he earned < $400 he doesn't have to file. I opened a Roth IRA for him for the full amount of his earned income. I made a copy of the check and will keep that in case there are questions later on.

Should I file a return for him though to document the earnings and Roth contribution.
A check made out to him proves little unless there is something attached explaining the payment (doubtful for a Soccer club) ; regardless of the IRS warning I would file a return and be done with it. I remember about 10 years ago, there was some kind of a telephone tax rebate that every household was entitled to, regardless of whether you needed to file a return. I recall filing a lot of returns for folks collecting SS and no other income and therefore no tax liability. A free $40 or so as I recall. No one complained.
The check doesn't say what it is for but it does have the name of the little league on it...

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