Funding Roth IRA for minor children

[Anonymous]

We want to set one up for my kid and match what he earns. If he makes $1,000 this year (from an organization, with pay stubs etc), can he keep the $1000 and we invest another 1k in his name? In this case, he would also have a savings account with 1k in it. Seems ok to me but it’s not actually the money he earned being invested.

[Anonymous]

Anonymous wrote:We want to set one up for my kid and match what he earns. If he makes $1,000 this year (from an organization, with pay stubs etc), can he keep the $1000 and we invest another 1k in his name? In this case, he would also have a savings account with 1k in it. Seems ok to me but it’s not actually the money he earned being invested.

Yes— the IRS cares about not putting in more than he earned but they aren’t going to try and track where the specific dollars came from.

[Anonymous]

Anonymous wrote:We want to set one up for my kid and match what he earns. If he makes $1,000 this year (from an organization, with pay stubs etc), can he keep the $1000 and we invest another 1k in his name? In this case, he would also have a savings account with 1k in it. Seems ok to me but it’s not actually the money he earned being invested.

Yes, this is what “everyone” here does. You put into kid’s ROTH the amount of earned income on his W2 (but not more than $7000).

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Did your child file taxes? If he only earned $1000 for the year, the Roth IRA can only be funded $1000.

You can pad this with another $400 that would be income like baby sitting that they don't need to pay payroll taxes on.

No, you can’t. There is no “padding” or “would be income.”

This is not entirely true. DH and I opened Roth IRAs two years ago for our now 17 year old DD. We’ve contributed the max each year ($6K last year) and will have put in $6.5K this year. The only real requirement is that DD needs to have at least that much or more in earned income for the year. This is no problem, since she “earns” $7K in household chores and errands. As long as you file a tax return that claims this much in income, you’re good. Best to keep the alleged income low enough to avoid state and federal taxes, of course.

Also, nothing stops you from opening such a Roth IRA and basically using it for yourself as a tax shelter for speculative investing and then withdrawing contributions later for whatever. Profits stay behind and can be pulled to help pay for college, first home, etc….

PP this is an incredibly dumb gamble. Hope you don’t have a security clearance.

+ 1. You are an absolute idiot. Just because you haven’t been caught yet doesn’t mean you won’t. Why take this risk?

[Anonymous]

Anonymous wrote:

Anonymous wrote:We want to set one up for my kid and match what he earns. If he makes $1,000 this year (from an organization, with pay stubs etc), can he keep the $1000 and we invest another 1k in his name? In this case, he would also have a savings account with 1k in it. Seems ok to me but it’s not actually the money he earned being invested.

Yes— the IRS cares about not putting in more than he earned but they aren’t going to try and track where the specific dollars came from.

I mean, except they do track it. Haven’t you looked at your IRS records online? It’s there, going back 10 years.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Did your child file taxes? If he only earned $1000 for the year, the Roth IRA can only be funded $1000.

You can pad this with another $400 that would be income like baby sitting that they don't need to pay payroll taxes on.

No, you can’t. There is no “padding” or “would be income.”

This is not entirely true. DH and I opened Roth IRAs two years ago for our now 17 year old DD. We’ve contributed the max each year ($6K last year) and will have put in $6.5K this year. The only real requirement is that DD needs to have at least that much or more in earned income for the year. This is no problem, since she “earns” $7K in household chores and errands. As long as you file a tax return that claims this much in income, you’re good. Best to keep the alleged income low enough to avoid state and federal taxes, of course.

Also, nothing stops you from opening such a Roth IRA and basically using it for yourself as a tax shelter for speculative investing and then withdrawing contributions later for whatever. Profits stay behind and can be pulled to help pay for college, first home, etc….

I wonder what age you could start paying for these chores? Five?

PP here. As long as your child has earned income, you’re good to go. Five seems a bit early, but perfectly legal. The household chores and errands angle works, but you have to state that this earned income is associated with a different household (e.g., like a friendly neighbor). Same applies with walking dogs, watering plants, mowing lawns, and babysitting. As long as the work is for an outside entity, and payment can be in cash, the IRS rules allow it.

The 'friendly' neighbor has to pay the child for the labor. Otherwise, this is fraud.

Technically, but nothing stops us from gifting $7K to our neighbor, who then pays our DD a different $7K in earned income in cash, who then gives us the $7K in cash to deposit on her behalf. But, practically, carrying around and exchanging so much cash is risky so we just move $7K directly to a Roth IRA and log the earned income. Easy as pie.

Why would a neighbor ever agree to this? They wouldn’t because it is fraudulent and stupid. As is what you are doing.

[Anonymous]

If my kid has earned income on W-2 but also makes cash mowing lawns, but still makes under the filing threshold, should we file a return for him if we want to contribute the full amount? W-2 plus cash from mowing lawns?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Did your child file taxes? If he only earned $1000 for the year, the Roth IRA can only be funded $1000.

You can pad this with another $400 that would be income like baby sitting that they don't need to pay payroll taxes on.

No, you can’t. There is no “padding” or “would be income.”

This is not entirely true. DH and I opened Roth IRAs two years ago for our now 17 year old DD. We’ve contributed the max each year ($6K last year) and will have put in $6.5K this year. The only real requirement is that DD needs to have at least that much or more in earned income for the year. This is no problem, since she “earns” $7K in household chores and errands. As long as you file a tax return that claims this much in income, you’re good. Best to keep the alleged income low enough to avoid state and federal taxes, of course.

Also, nothing stops you from opening such a Roth IRA and basically using it for yourself as a tax shelter for speculative investing and then withdrawing contributions later for whatever. Profits stay behind and can be pulled to help pay for college, first home, etc….

I wonder what age you could start paying for these chores? Five?

PP here. As long as your child has earned income, you’re good to go. Five seems a bit early, but perfectly legal. The household chores and errands angle works, but you have to state that this earned income is associated with a different household (e.g., like a friendly neighbor). Same applies with walking dogs, watering plants, mowing lawns, and babysitting. As long as the work is for an outside entity, and payment can be in cash, the IRS rules allow it.

The 'friendly' neighbor has to pay the child for the labor. Otherwise, this is fraud.

Technically, but nothing stops us from gifting $7K to our neighbor, who then pays our DD a different $7K in earned income in cash, who then gives us the $7K in cash to deposit on her behalf. But, practically, carrying around and exchanging so much cash is risky so we just move $7K directly to a Roth IRA and log the earned income. Easy as pie.

Why would a neighbor ever agree to this? They wouldn’t because it is fraudulent and stupid. As is what you are doing.

And wouldn't the neighbor then be subject to employment and unemployment taxes? Unless the kid has set up a separate business entity in which case the kid is subject to those taxes.

[Anonymous]

Anonymous wrote:We want to set one up for my kid and match what he earns. If he makes $1,000 this year (from an organization, with pay stubs etc), can he keep the $1000 and we invest another 1k in his name? In this case, he would also have a savings account with 1k in it. Seems ok to me but it’s not actually the money he earned being invested.

This is fine.

[Anonymous]

Anonymous wrote:

Anonymous wrote:We want to set one up for my kid and match what he earns. If he makes $1,000 this year (from an organization, with pay stubs etc), can he keep the $1000 and we invest another 1k in his name? In this case, he would also have a savings account with 1k in it. Seems ok to me but it’s not actually the money he earned being invested.

This is fine.

Yes, this is fine. I have heard families encourage their kids to earn in money college or HS. They then put an equivalent amount in kids IRA but the kid is still free to use the earned money for whatever. Money is fungible. Your kid can transfer 1K to Roth IRA and then you can gift your kid 1K for no reason.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:We want to set one up for my kid and match what he earns. If he makes $1,000 this year (from an organization, with pay stubs etc), can he keep the $1000 and we invest another 1k in his name? In this case, he would also have a savings account with 1k in it. Seems ok to me but it’s not actually the money he earned being invested.

Yes— the IRS cares about not putting in more than he earned but they aren’t going to try and track where the specific dollars came from.

I mean, except they do track it. Haven’t you looked at your IRS records online? It’s there, going back 10 years.

Yes they track how much you earn and how much you contribute to your IRA but they don’t track your bank balance to see if first you deposited your paycheck and then wrote a new check to Fidelity to cover the IRA.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:We want to set one up for my kid and match what he earns. If he makes $1,000 this year (from an organization, with pay stubs etc), can he keep the $1000 and we invest another 1k in his name? In this case, he would also have a savings account with 1k in it. Seems ok to me but it’s not actually the money he earned being invested.

Yes— the IRS cares about not putting in more than he earned but they aren’t going to try and track where the specific dollars came from.

I mean, except they do track it. Haven’t you looked at your IRS records online? It’s there, going back 10 years.

Yes they track how much you earn and how much you contribute to your IRA but they don’t track your bank balance to see if first you deposited your paycheck and then wrote a new check to Fidelity to cover the IRA.

Yes, you are right. I thought got this post confused with the posters encourage others to commit tax fraud. Sorry!

[Anonymous]

Anonymous wrote:If my kid has earned income on W-2 but also makes cash mowing lawns, but still makes under the filing threshold, should we file a return for him if we want to contribute the full amount? W-2 plus cash from mowing lawns?

No you do not have to file just for the Roth IRA. You can still contribute whatever he earned. Just keep some records on the lawn mowing. Addresses and dates and payment amount.

[Anonymous]

Just don’t have kids. It’s so much easier and you don’t need Roth this or fraud that.

[Anonymous]

Anonymous wrote:If my kid has earned income on W-2 but also makes cash mowing lawns, but still makes under the filing threshold, should we file a return for him if we want to contribute the full amount? W-2 plus cash from mowing lawns?

You don’t need to file for Roth contributions (just keep good records), but if the kid makes more than $400 mowing lawns (ie not W2 money), then they have to file a tax return. My son ran into this as a baseball umpire for little league. They are considered independent contractors.