Funding Roth IRA for minor children

[Anonymous]

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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.

They don’t really need to agree to it, though. We’re talking cash transactions here. All you need is a spreadsheet that documents the various jobs your kid is claiming to have done. Obviously you need to report the earnings to the IRS (duh!), but if your income is low enough, you’re getting most of if not all your taxes back anyway. We like to wait until a few months prior to tax deadline and look for some person in our neighborhood or zip code that has passed away recently. Then, we create a spreadsheet of chores, lawn mowing, house maintenance, and other stuff for that individual. Max out to the Roth IRA limit. No way for IRS to validate with alleged employer, since they’re dead.

Been working this angle for years and it’s as smooth as butter.

[Anonymous]

Anonymous wrote:

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.

They don’t really need to agree to it, though. We’re talking cash transactions here. All you need is a spreadsheet that documents the various jobs your kid is claiming to have done. Obviously you need to report the earnings to the IRS (duh!), but if your income is low enough, you’re getting most of if not all your taxes back anyway. We like to wait until a few months prior to tax deadline and look for some person in our neighborhood or zip code that has passed away recently. Then, we create a spreadsheet of chores, lawn mowing, house maintenance, and other stuff for that individual. Max out to the Roth IRA limit. No way for IRS to validate with alleged employer, since they’re dead.

Been working this angle for years and it’s as smooth as butter.

Finally we’ve discovered value to be extracted from otherwise useless old people!!

[Anonymous]

I wrote in another thread what I'm doing for my kids when it comes to Roths. I had to go through the whole thread to make sure it's not here.
My kids are not working and I'm not making them 'work' just to get Roths going. But I will have them open the accounts when they start earning money some day.
I have two Roths for myself and the kids as beneficiaries. I have no needs for my Roths, but I wanted the kids to have an early start just like many of you. Both Roths show 100% return since February this year. For me, great return is just as important as starting early since the maximum is still so low at $7k. I got to make the most of it.
There was time when I was also looking into having my kid do chores and then opening Roth, but is seemed too sketchy.
One kid also inherited a small Roth and an IRA. I had to sell the crap that was in it and bought something much faster.
Inheriting the accounts was easy because they had beneficiary named and skipped probate.