Good Day,
Being curious, as per a recent discussion; I have a question regarding the legal status of a fund company document and its interpretation of IRS documentation. Per the below "Qualifying income" statement, does one assume this is the general interpretation of what the IRS may consider for a "minor's" income.
---Per Fidelity's Minor Acct., Roth IRA
Eligibility
Minors must be under the age of 18.
Minors must have employment compensation (there is a footnote/link to the IRS Pub. 590 at the web page)
Qualifying income can come from a job and/or self-employment such as babysitting, mowing lawns, or shoveling snow.Fidelity page link regarding Minor Roth IRA:
https://www.fidelity.com/retirement-ira/roth-ira-kidsAdditionally, I am aware that a Roth IRA generates a Form 5498, indicating the SSN, account number, current value of the Roth, etc. Obviously, if the IRS needed to verify any information; they have all the needed data.
Sniffing around at the IRS site indicates that: generally, work income generates a W-2 form (generally is the exact wording at the IRS page). I also looked at Fairmark.com (legal) and it appears the site leans towards the W-2 aspect, too; but the real gray area (from other opinions) is that minors may generate income (about $6,300 in 2016) from their own work, not receiving a W-2 from an employer and do not have to report the income (1040) unless they did work that could be considered "self-employment". Self-employment is generally established as performing work as: placing oneself via advertising and such to perform work.
A rough summary, IMHO; is that minors may generate income from various "chores", including work at their our household or at the neighbors house (mowing the lawn, etc.), do not have to report the earned monies (if less than $6,300), do not have to have W-2 income and may place this money in a minor Roth IRA account.
Lastly, one would not expect the IRS to pursue an audit of a minor Roth IRA account, eh?; and
that Fidelity must be interpreting income from mowing lawns, etc. to not be a problem area related to income for funding a minor Roth IRA. Hoping the above is not too disjointed, as this is a rush write prior to other obligations in life.
Any future ramifications to consider?
Your opinions are appreciated.
Regards,
Catch
Comments
Might be worth a few minutes of your time. I'd loved hear what these experts think so keep us informed with your query.
link (requires setting up a login to post question, but it's free):
https://irahelp.com/forums/ira-discussion-forum
Crap............I keep forgetting about Slott's site. One may read any of the forums without sign up.
The below connects with what I first wrote about the 5498 form and possible complications of the IRS seeing a Roth IRA contribution, but no W-2 income. Replies from the Slott site for this first question. BOLD = my highlight
Thank you for the site reminder, bee.
Regards,
Catch
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I was reading a paper about opening Roth IRA for minors. If a minor helps in cooking, filing, gardening, grocery bagging, household cleaning, lawn mowing, news paper delivering, painting, emailing etc parent can pay their child and that money can be saved in Child's Roth IRA with match. I live in New York City and can do this in New York City. My son is only 11 years. How about child labor law?
The IRS has not issued
Submitted by Alan-iracritic@... on Wed, 2016-04-06 23:43
The IRS has not issued guidance on this question, and have looked the other way for years. However, technically these payments are not taxable compensation and no minor is expected to report such income on a return, and parents do not issue W-2 forms for allowances paid to minors. An IRA contribution is only allowed for taxpayers who have taxable compensation, other than spousal contributions.
Shouldn't be done
Submitted by nathan@thekastn... on Thu, 2016-04-07 09:37
As mentioned prior, IRS regs require that the roth contributor (or his/her spouse) have "taxable compensation". Since this allowance you are paying the 11-year old is not being reported as taxable income, and no w-2 is being issued, your child lacks "taxable compensation".Logistically, by the way, when a contribution is made to a qualified retirment plan, the custodian holding the funds will generate a form 5498. They may or may not send you a copy, but they always send one to the IRS. That form will detail any money was contributed and/or rolled over. When the IRS gets that form, sees that there were contributions made, but then also sees no taxable compensation reported for that same SSN, you will likely have trouble on your hands.
Regards,
Ted
Thank you for the suggestion.
From what I have gathered/read, minor Roth IRA's for those, say 12-16 years of age are funded without benefit of a taxable wage via an issued W-2. This makes sense to me, as the majority of minors younger than 16 would not have access to traditional employment such as the local ice cream shop during the summer. The indication is too maintain a written log indicating the type of work and amount paid when a minor mows the family or neighbors lawn or for our area, cleaning up lawns from all of the debris from the 60mph wind storm from 2 weeks ago. Keeping in mind that a minor is not going to be paid a wage of $50/hour for doing lawn work. $5/hour would not be out of bounds for this or the kids who stop in the winter to shovel the snow from the driveway for $10.
I feel this Roth IRA funding is an IRS gray area and not pursed for audit, knowing minors will generate income, but be too young to qualify under labor laws of most states for work for an employer generating a W-2.
Regards,
Catch