Over the last few years I've occasionally read discussions about saving for kids. IIRC, one discussion was about the power of saving a little bit every year because the power of compounding can result in children having a lot more because of the long time period.
I was just wondering why you couldn't "pay" your kids for whatever, the pictures you take of them for instance, and then using the earned income to contribute to a Roth IRA on their behalf? If you pay them less than $1000/year then I believe there's no requirement to pay employment taxes and they wouldn't owe any taxes either. If you funded a Roth IRA with that earnings, since they don't "need" the money at a young age, all future earnings would be tax free and eventually the child would have the ability to withdraw any contributions, not earnings, if they did eventually need it. If they didn't need it then they'd have a nice amount of savings by the time they left home, but most importantly they'd have a nice base for growing their retirement savings tax-free.
At the same time, if you want to save more then I guess you could use some form of taxable account, like a UTMA, and then use it to add more to the Roth when a child starts working and has their own earned income but isn't very likely to be saving for retirement as a teenager.
I've done the latter, using inheritance from a grandparent when my daughter was an infant to fund a Roth IRA when she started working as a teenager, but never considered the first idea until today.
Am I missing something? Or is this a standard saving idea that I've just never read about? Once my kids start to have their own kids I'd consider doing something like this for grandchildren if I wasn't violating child labor or some other laws.
Comments
I never started a 529 or any other college savings plan for my kids, for instance. I just didn't feel the need for the additional tax shelter.
So each person can get ideas from others on what to do, but ultimately trust oneself to do what's right for their situation.
PS - I think the most important thing I can do for my kids is give them a quality education and the "paper" aka degree is worth something. If I can do that, they can take care of themselves, and I have to worry less about whether I should leave anything for them when I die or not. Their kids would be my pride, but not my responsibility.
Chores are a great place to form a work contract with your young kids (5-16). You write up an agreement, they sign it, if they fulfill their end of the bargain (feed/walk the dog, sweep the garage, mow the lawn, etc.) they get paid. This payment opens the opportunity to talk about savings and maybe opening a bank account. These payments can also be formalized into a ledger and at the end of each tax quarter (4X a year) a formal 1099Misc can be generated using tax software and issued to your kids. In a sense, your kids are private contractors earning a wage that you pay them. Concepts of accounting, time management and quality control are just a few of the skills they will learn. Taxes may have to be paid quarterly on these earning. At tax time (end of year), IRA contributions can be discussed and decided own. A Roth IRA is a great way for your kids to invest their earned income.
All of this will prepare your kids for the world of work. I applaud your efforts.
Regards,
Ted
My girls can spit in my eye, they will still be my princesses.
Or maybe I just want at least one of them to become even just your run-of-the-mill mutual fund manager and then no one has to worry about anything. Whatever they cannot do, they can outsource that responsibility to someone else.
Are you still accepting adoption applications?
If so, "What's for dinner?"
This is the common description one finds regarding Roth IRA's (in italics) for minors.
Children of any age can contribute to an IRA as long as they have earned income from a job, be it babysitting, yard work or walking neighborhood dogs. For 2013, the maximum your child can contribute to an IRA (either traditional or Roth) is the lesser of $5,500 or his or her taxable earnings for the year. For example, if your son earns $3,000 this year, he could contribute up to $3,000 to an IRA; if your daughter earns $10,000, she could contribute only $5,500, the maximum contribution. If your child has no earnings, he or she cannot contribute at all.
The important thing to remember is that your child must have earned income during the year for which a contribution is made. Money from allowance or investing income does not count as earned income and, therefore, cannot be used towards contributions. Ideally, your child will receive a W-2 for work performed; otherwise, it is a good idea to keep excellent records from jobs that don’t provide a W-2: babysitting, yard work, mothers’ helpers, entrepreneurial endeavors, etc. Your records should include:
Type of work
When the work was done
For whom the work was done
How much your child was paid
You may be able to pay your child for work done around the house provided it is legitimate and the pay is at the going market rate (you probably won’t get away with paying your son $150 an hour to mow the lawn, for example).
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>>>My own two cents worth. Obviously, it may be a bit difficult to justify to the IRS paying your 5 year old child $5/hour to rake the fall leaves from the yard; but it appears the work related space is fairly wide open for minors not generating a W-2. Documentation if no W-2, yes?
A few math snips rounded using the below calculators for the compound effect of small amounts of money, including the reverse growth compound of inflation.
2017, initial investment of $1,000 and add $83 each month (about $1,000 annual) for 50 years, at 6% growth/year, compounded annually = $308,000 in 2067. On the other hand, inflation at 3%/year (and yes, inflation compounds, too) $1,000 today needs $4,256 for the same purchasing power in 2067.
As @bee noted, and I agree fully; is to help establish a sense of work, money and money's work, too; for the young one's. Likely lots of other thoughts about this topic, but I'll end here for now. Hey, let me know if anyone finds these numbers or data amiss.
This link: Why open a Roth for a minor?
http://www.waterworthwa.com/Blog.aspx?acId=61559
This link: broad Google search, qualifying income for minors
https://www.google.com/#q=how+to+indicate+minor+income+from+yard+work&*
This link: broad Google search, numerous links related to minors and Roth IRA
https://www.google.com/#q=roth+ira+minors+rules&*
This link: IRS pub. 590, IRA's
https://www.irs.gov/publications/p590a/ch01.html#en_US_2014_publink1000230355
This link: Forward inflation calculator
https://www.vertex42.com/Calculators/inflation-calculator.html
This link: Compound rate of return calculator
https://www.investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator
Regards,
Catch
Other than that they live in an extremely stress free environment. I generally leave them along including not bothering with their school work. And now they are both in high school, so if they made it thus far, I think they will be fine.
Just saying. There are lot of pressures on kids these days. Teaching them how to invest can wait or they can figure it out. Besides I surely don't want my elder who I dream of becoming a "successful" mutual fund manager, tell a reporter "my father used to make me select an investment every day at dinner time and make me justify it". Such bullshit would just kill me alive.