HS/College income - optimizing taxes

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psteinx
Posts: 3570
Joined: Tue Mar 13, 2007 2:24 pm

HS/College income - optimizing taxes

Post by psteinx » Wed Feb 19, 2020 3:19 pm

I have 2 kids in college, one in HS. The college kids had summer jobs in '19, and one had a part time job during the year. Total income in the low-mid 4 figures (say $3-4K or so). Likely a bit more - perhaps closer to $6-10K as they get a bit deeper into college - and eventually, after they graduate, likely high income professional jobs (both in engineering schools).

In years past, with comparable or slightly lower income, they've had zero or minimal federal and state taxes. I assume the low tax regime will continue for '19, and probably the next few years, too.

What methods are available for them to fully utilize these low tax years, especially in light of the likely higher tax years down the road?

Contribute to Roth-IRA?
IIUC - Can contribute ~100% of W-2 income to these, then it grows tax free for decades, and they can withdraw it tax free when they retire. So, ~40+ years of tax-free growth. How easy to withdraw/borrow against, if they need funds in the meantime (house downpayment or whatever)? And, IIUC, they can contribute for 2019 through roughly 4/15/2020?

What else is out there?

FWIW, my wife and I are high income, above the thresholds for many credits/deductions and the like, so I'm a little fuzzy on this stuff.

smitcat
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Joined: Mon Nov 07, 2016 10:51 am

Re: HS/College income - optimizing taxes

Post by smitcat » Wed Feb 19, 2020 3:22 pm

"IIUC - Can contribute ~100% of W-2 income to these, then it grows tax free for decades, and they can withdraw it tax free when they retire. So, ~40+ years of tax-free growth"
That is what we did with our daughter - started early with Roth and continued thru college years.

DIFAR31
Posts: 414
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Re: HS/College income - optimizing taxes

Post by DIFAR31 » Wed Feb 19, 2020 3:27 pm

psteinx wrote:
Wed Feb 19, 2020 3:19 pm
IIUC - Can contribute ~100% of W-2 income to these, then it grows tax free for decades, and they can withdraw it tax free when they retire.
Can contribute 100% of W-2 income, up to the annual Roth contribution limit, which for someone under age 50 is $6,000 in both 2019 and 2020.

b42
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Re: HS/College income - optimizing taxes

Post by b42 » Wed Feb 19, 2020 3:28 pm

When I was 19 I opened a Roth IRA and most of my summer work earnings went into it, about $3k a year. I got most of my federal taxes back, plus I get tax-free growth in the future.

Another idea, do your kids have any appreciated stock or mutual funds? If they have capital gains they could sell them and pay the 0% capital gains tax in the lower brackets. Or if you plan on gifting them any appreciated stock they could do the same.

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teen persuasion
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Re: HS/College income - optimizing taxes

Post by teen persuasion » Wed Feb 19, 2020 8:29 pm

b42 wrote:
Wed Feb 19, 2020 3:28 pm
When I was 19 I opened a Roth IRA and most of my summer work earnings went into it, about $3k a year. I got most of my federal taxes back, plus I get tax-free growth in the future.

Another idea, do your kids have any appreciated stock or mutual funds? If they have capital gains they could sell them and pay the 0% capital gains tax in the lower brackets. Or if you plan on gifting them any appreciated stock they could do the same.
Watch out for the kiddie tax on stock sales.

HereToLearn
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Joined: Sat Mar 17, 2018 5:53 pm

Re: HS/College income - optimizing taxes

Post by HereToLearn » Wed Feb 19, 2020 10:29 pm

Roth is where I directed my children. The one who went through more money also didn't fill out the W-4 properly and ended up with a sizable Fed & state return each spring. He also worked during his Jan break to supplement his summer earnings. The combination of the Jan earnings and the tax refund enabled him to deposit a decent amount in his Roth each year.

I think my early repeated messages took root because now as a recent college graduate, he is fully funding his Roth even after funding his 401K up to the company match.

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