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So both my princesses are going to do summer jobs this year. Wondering if I can start IRAs for each of them, may be even a Roth assuming that is somehow possible. Anyone done this? I'm assuming 18% of earnings limit would still apply.
I've done this for both my kids, starting as soon as they had earned income. I opened Roth IRAs for each of them. Whatever they earned (including dogwalking, babysitting, etc. with careful documentation), we made a matching contribution to the Roth. The maximum is $5,500 or total earned income, whichever is lower. No 18% of earnings limit that I know of. I also helped them research investments and we decided on a Vanguard 2045 retirement fund. If the kid is under 18, then it has to be a joint account with a parent. Once they turn 18, it can convert to being in just their name.
@VintageFreak ADD: We used Fidelity for the below noted minor ROTH, as parent accounts are held there. But, "which company" to use should be a serious consideration, IMHO; as the ROTH hopefully will be in place for many years, and the company able to offer all investment needs to the future adult account holder. I have not reread these links below, but this may have already been discussed in one of the below links; but, I'll add this anyway: ---Fund vendors as we discuss here (so I'm not including a local bank or credit union acct.) have minimum investment amounts to open an account for investment "x" for everyone. As a minor ROTH IRA has to be a custodian account by one of the parents, any minimum is waived (at least with Fidelity and I presume other companies, too) as Fido views the total $ already on account with the parent. --- Second item: a minimum amount needed to invest in a mutual fund may be $2,500. Well, not wanting to have the minor ROTH IRA sit parked in a money market fund until the minimum is reached (could take years, yes?), the money was invested in etf's. An overwhelming number are available at Fido, eh? Many etf's at Fido are available without commission charges for a buy/sell. So, if the minor ROTH IRA has a first deposit of say, $175; one may purchase "x" number of shares of an etf, including fractional share amounts. The only limit to purchase of an etf in this example is if the etf , 1 share cost is more than $175. --- Our daughter kept her hard earned monies; as we explained that we would fund her Roth as a gift for her hard work. Note: anyone my make the actual contribution to the Roth. We maintain a separate paper file for her Roth with any notes and documents about work income, in order to explain any possible future questions about "how was this money" generated. Lastly, at least with Fido; is that we are able to readily view full account values and related, including ready access to buy/sell and whatever; as the account was originally linked to me (custodian) on the same page view as my traditional and Roth IRA's full account info. 'Course, a full discussion about a most critical part of the Roth account at such an early age involved the power of compounding over many years; as well as maintaining adds to the account. Hopefully, the below linked; two MFO discussions will help with your decisions. I may add to this, if my low coffee intake brain cells remember something. Regards, Catch
Below: our daughter's two etf holdings at this time, in her ROTH IRA.
Hi VF: We've done this for our grandkids, ages 11 and 7. They don't have to have a W-2, just keep a meticulous log of hours and persons worked for. The 11yo worked for two old ladies down the street, mowing, weeding, planting bulbs, etc. The little girl dog-walked, pet-sat. The opening accounts were piddling amounts, but that's not the point. Their Roth IRAs are up and running, which I think gets them past that hesitation to tackle paperwork, etc. When they have actual w-2's later, things will be a lot easier for them. BTW, by the nature of their work they do not have to be labelled "self-employed"; they are "domestic" or "household" workers. best of luck, you are doing a great thing, hawk
I did this for both kids long ago, kept earnings amount notes but no meticulous logs, and indeed you can let the contribution amount serve as the earning note.
Okay so basically for EVERY dollar my kid earns I can put upto that amount in Roth IRA. Fantastic! And I presume I have until April 2019 to do that? That way I know exactly how much they will earn.
Hi VF: We've done this for our grandkids, ages 11 and 7. They don't have to have a W-2, just keep a meticulous log of hours and persons worked for. The 11yo worked for two old ladies down the street, mowing, weeding, planting bulbs, etc. The little girl dog-walked, pet-sat. The opening accounts were piddling amounts, but that's not the point. Their Roth IRAs are up and running, which I think gets them past that hesitation to tackle paperwork, etc. When they have actual w-2's later, things will be a lot easier for them. BTW, by the nature of their work they do not have to be labelled "self-employed"; they are "domestic" or "household" workers. best of luck, you are doing a great thing, hawk
Actually my elder had income in 2016 and lil bit in 2017. I'm just an idiot for not asking this question before. It's only now I'm looking to transfer my IRAs out of TDA, it suddenly hit me.
Also they will have W-2s so no problem there.
I actually also filed a tax return for my elder as well for 2016 and 2017. I want them to understand things I didn't when I was their age.
@davidrmoran - they are not going to be earning that much money The whole point is for them to earn and spend their money on nonsense. Did I say they were my princesses? True, but their father is not king
Another point is to force them to start understanding the real world. My wife has a PhD but refuses to have anything to do with anything related to money. This has been my big problem and I need my kids to take control once I'm gone. I'm trying to make a small start here.
So yeah, I'm going to wait and see how much they earn and then create matching $ Roth IRA for them. I will wait till summer is over and then fund them and assuming I can always add before April 2019 in case they earn something over winter break as well.
My understanding of Roth contributions (so take this with a grain of salt) is that the contribution can not exceed the yearly limit nor can it exceed total earned income.
You can "substitute their money with your money" as far as the funding source for the Roth is concerned, but you can't match there earned dollars with any additional unearned dollars. The term "matching" here should be replaced with a better descriptor. Sounds too much like an employer match program. You're substituting your resources for their resources as the funding source for the Roth.
Examples: 1. Danny, an unmarried college student working part-time, earns $3,500 in 2017. Danny can contribute $3,500, the amount of his compensation, to his IRA for 2016. Danny’s grandmother can make the contribution on his behalf. 2. John, 42, has both a traditional IRA and a Roth IRA and can only contribute a total of $5,500 to either one or both in 2017. 3. Sarah, age 52, is married with no taxable compensation for 2017. She and her husband reported taxable compensation of $60,000 on their 2017 joint return. Sarah may contribute $6,500 to her IRA for 2017 ($5,500 plus an additional $1,000 contribution for age 50 and over).
It seems that example 1 above applies to many young people who held part time jobs. Filing a tax return is necessary to report their earned income to match the $ amount allow for Roth IRA. Filing Form 8606 is also necessary to keep track of their Roth IRA.
Also, funding a child's IRA is no different from funding a UGMA - it's a gift, so it counts against your yearly gift tax exclusion.
Not that $5,500 (or less, if the child earns less) comes close to the limit, but this does affect how much extra you can gift without tax implications.
See, e.g. VanguardApril 2016 podcast: "gifting with a Roth ... that's one way to gift assets while using the annual gift-tax exclusion."
Child funds Roth with all of his or her earned moneys (up to Roth limit) while you give the child equivalent amount to make up for it, if not more, as you usually do in supporting a child, up to $5M+ lifetime gift exemption. No?
@Sven - Actually, you don't file form 8606 for Roth IRA. That's for regular IRA so you can keep track of any contributions you made after taxes if you are in the nondeductible category. There's no filing requirement to report the amount put into a Roth IRA. I have only helped my kids file income tax returns when they had (silly) employers that withheld federal taxes and they wanted to get their $32 back.
Regarding what you "usually do in supporting a child": "Payments for support (paying for food, clothing, shelter, court-ordered child support payments, etc.) for your minor children for which you are legally obligated are not considered gifts." http://financialanswers.com/page.php?b=24549975-0&c=727
This is nothing more than common sense, formalized. Feeding your children is not a gift. Funding an IRA or a UGMA account, whether directly or indirectly, is.
Also, funding a child's IRA is no different from funding a UGMA - it's a gift, so it counts against your yearly gift tax exclusion.
Not that $5,500 (or less, if the child earns less) comes close to the limit, but this does affect how much extra you can gift without tax implications.
See, e.g. VanguardApril 2016 podcast: "gifting with a Roth ... that's one way to gift assets while using the annual gift-tax exclusion."
Oh, so not only can i stash some money away which can grow tax deferred and then kids don't have to pay taxes when they withdraw it on Mars (because who'll be on Earth then?), I also get a tax break because I "gifted" a Roth to them?!?!?!?!
Just please tell me Turbo Tax will let me figure out all this stuff when I file everyones tax returns.
@Sven - Actually, you don't file form 8606 for Roth IRA. That's for regular IRA so you can keep track of any contributions you made after taxes if you are in the nondeductible category. There's no filing requirement to report the amount put into a Roth IRA. I have only helped my kids file income tax returns when they had (silly) employers that withheld federal taxes and they wanted to get their $32 back.
LOL. Exactly what happend to my elder in 2016. In 2017, no tax was withheld but I decided will file every year now that I started and get princess involved in the "process".
Oh, so not only can i stash some money away which can grow tax deferred and then kids don't have to pay taxes when they withdraw it on Mars (because who'll be on Earth then?), I also get a tax break because I "gifted" a Roth to them?!?!?!?!
Just please tell me Turbo Tax will let me figure out all this stuff when I file everyones tax returns.
Yes, actually. Say you live in Oregon, and die tomorrow with assets (home, investments, other properties) worth $1,005,500. Unless you left part of that estate to a spouse and/or charity, your estate would get taxed $550. That's 10% of the excess over $1M.
But if you gift a $5,500 Roth IRA to someone (doesn't have to be a child) today, before you die, then your estate won't get taxed a dime tomorrow since it will only be worth $1M. And that Roth will grow tax-free, assuming the recipient was qualified to have $5500 contributed to the Roth (income under a certain limit, at least $5,500 of compensation.
Turbo tax won't help you with the estate tax, but it could help your executor.
We don't have kids, so this particular subject was not of much personal interest. But given the number of responses, I thought that I'd take a quick look at it. What a wonderful example of knowledgeable and thoughtful people extending their help to someone! Thanks to everyone here for your time and interest in helping out another MFO member.
Great IRS memo. But did you look at the cites, and what they cover ?
I am pleased to have violated this sort of thing for decades. Child funds Roth ira, you give increased allowance as a reward for child's discipline. Something like that.
Or not.
Incredulous, I did ask a trust and estates attorney, just for kicks. His reply: "You can absolutely put money in a child’s IRA. There is no issue there. In fact I fund my children’s Roth IRA’s each year."
Assuming that the parent or grandparent does make a gift to the minor, then what are the tax consequences to the donor? ... the donor may give up to the maximum contribution for the custodial IRA ($5,500) (assuming that the minor earned at least that much income) and because that amount is less than the Gift Tax Annual Exclusion amount i.e. Fourteen Thousand Dollars ($14,000) in 2015 it will be excluded from being a taxable gift ..."
Just as I wrote above: "Not that $5,500 (or less, if the child earns less) comes close to the limit". But I also added that: "this does affect how much extra you can gift without tax implications."
See if your lawyer will say that there is never an issue putting money in a child's IRA even if you've given the child a $15K gift card the same year. If he changes his story, then recognize that the answer you got was not legal advice, not something you could take to the bank (or to the IRS), but merely an off the cuff remark "just for kicks."
Regarding an "increased allowance as a reward for a child's discipline":
- You said before that the money was gifted to replace money the child used for the IRA; the point of the end result test is that one can't hide gifting of an IRA via this subterfuge of an alternative rationale.
- The attorney appears to have dismissed this as well, noting that you can put money directly in the IRA, thus eliminating not only the excuse for the gift, but the entire two step process. Rather than (a) giving money to child, and (b) child putting money into the IRA, he went right to (c) you putting money into the IRA.
BTW, that increased allowance excuse? That's a gift, too.
"it's worth a mention that there could be federal gift tax consequences to you, as the parent and donor, for an allowance since it's really a gift."
I encourage everyone to return to amounts reality, where this thread started, and read the Forbes article, particularly after the quote here.
>> Also, funding a child's IRA is no different from funding a UGMA - it's a gift, so it counts against your yearly gift tax exclusion.
Say you do not do it directly but in the proper two-step sequence, like there's a difference: Child earns $5k somehow (dealing drugs, say), child puts that amount in their Roth ira, you "reimburse" (or something --- reward for entrepreneurship?) child for that $5k. How are you believing that this gets tracked --- by any entity? I do understand you are saying it is not legit.
The attorney you spoke with said: "You can absolutely put money in a child’s IRA. There is no issue there."
No wiggle room there. So that's just plain wrong when it comes to multiple gifts (including the IRA funding) adding up to over $15k ($14K last year). "If you gave gifts to someone in 2017 totaling more than $14,000 (other than to your spouse), you probably must file Form 709. " IRS, Instructions for Form 709.
Here's what I initially wrote, in toto:
Also, funding a child's IRA is no different from funding a UGMA - it's a gift, so it counts against your yearly gift tax exclusion.
Not that $5,500 (or less, if the child earns less) comes close to the limit, but this does affect how much extra you can gift without tax implications.
See, e.g. VanguardApril 2016 podcast: "gifting with a Roth ... that's one way to gift assets while using the annual gift-tax exclusion."
I didn't try to wriggle out of counting the IRA as a gift by suggesting one give the cash equivalent to the child instead. (It still counts.) I didn't try to wriggle out of the cash being counted as a gift by calling it "allowance". (It's still a gift.)
I didn't try to wriggle out of taxes by suggesting, hey, it doesn't matter because I won't get caught.
In a followup, I showed how this could actually affect people in a state like Oregon where there's "just" a $1M estate tax exemption. In that respect, Massachusetts is like Oregon. Though in the Bay State homes worth more than this million dollar exemption are often the norm.
Note that Mass. treats both gifts and exemptions very differently from federal (and Oregon) law. Perhaps you'd care to comment on how the cliff tax comes into play there even if you've gifted away most of your estate. If not, here's a page that might help:
the reality is unless you have a very large estate, there will be no penalty even if you make gifts of more than $14,000 [now $15K] and don't report them to the IRS. That said, they could come into play on your Massachusetts estate tax return.
People taking up your suggestion to read in Forbes what follows the sentence I quoted will find in the same paragraph: "If you are gifting those kinds of dollars as an allowance to your kids, consult with your tax professional ."
I think the idea is to consult an attorney or other professional for real answers, not "just for kicks." Sound advice.
Actually, that was a consulted elder-law attorney's real answer; "kicks" was my feeble attempt to be rhetorical. Maybe the response was written in the spirit of the Margolis "and don't report them" quote; dunno. I could have more specifically asked their advice re larger amounts and gift strictness and status and tracking. Going back to the OP, I (like so many others) was trying to be affirmative to VintageFreak's question about opening Roths for his daughters. Just do it. But sure, paying an attorney is sounder than asking here.
All I was trying to communicate was (and is) that the child's IRA, however the parent gets the money into it, is a gift. So if you make other gifts to the same child in the same year, be aware that it could put you over the $15K gift exclusion for the year.
Margolis' comment about not reporting raises an existential question. If a tree falls in the forest .... No, not that one But something similar.
If a law has no penalty for violating it, is there even a law? My personal answer is yes, and I would file information forms just to keep the record straight.
What Margolis writes in response to a posted question about filing a Mass. estate tax form when no tax is due is that it's a gray area. His firm doesn't file if the estate is well below the $1M threshold, but does file if it's close and the value of some estate assets might be disputed.
Comments
ADD: We used Fidelity for the below noted minor ROTH, as parent accounts are held there.
But, "which company" to use should be a serious consideration, IMHO; as the ROTH hopefully will be in place for many years, and the company able to offer all investment needs to the future adult account holder.
I have not reread these links below, but this may have already been discussed in one of the below links; but, I'll add this anyway:
---Fund vendors as we discuss here (so I'm not including a local bank or credit union acct.) have minimum investment amounts to open an account for investment "x" for everyone. As a minor ROTH IRA has to be a custodian account by one of the parents, any minimum is waived (at least with Fidelity and I presume other companies, too) as Fido views the total $ already on account with the parent.
--- Second item: a minimum amount needed to invest in a mutual fund may be $2,500. Well, not wanting to have the minor ROTH IRA sit parked in a money market fund until the minimum is reached (could take years, yes?), the money was invested in etf's. An overwhelming number are available at Fido, eh? Many etf's at Fido are available without commission charges for a buy/sell. So, if the minor ROTH IRA has a first deposit of say, $175; one may purchase "x" number of shares of an etf, including fractional share amounts. The only limit to purchase of an etf in this example is if the etf , 1 share cost is more than $175.
--- Our daughter kept her hard earned monies; as we explained that we would fund her Roth as a gift for her hard work. Note: anyone my make the actual contribution to the Roth. We maintain a separate paper file for her Roth with any notes and documents about work income, in order to explain any possible future questions about "how was this money" generated.
Lastly, at least with Fido; is that we are able to readily view full account values and related, including ready access to buy/sell and whatever; as the account was originally linked to me (custodian) on the same page view as my traditional and Roth IRA's full account info. 'Course, a full discussion about a most critical part of the Roth account at such an early age involved the power of compounding over many years; as well as maintaining adds to the account.
Hopefully, the below linked; two MFO discussions will help with your decisions. I may add to this, if my low coffee intake brain cells remember something.
Regards,
Catch
Below: our daughter's two etf holdings at this time, in her ROTH IRA.
https://screener.fidelity.com/ftgw/etf/goto/snapshot/portfolioComposition.jhtml?symbols=ACWI
https://screener.fidelity.com/ftgw/etf/goto/snapshot/portfolioComposition.jhtml?symbols=FTEC
Below: 2 MFO discussion links about much of this.
March 2017, MFO
https://www.mutualfundobserver.com/discuss/discussion/31973/saving-for-kids
April 2017, MFO
https://www.mutualfundobserver.com/discuss/discussion/32191/tax-returns-for-minors-with-roth-iras
We've done this for our grandkids, ages 11 and 7. They don't have to have a W-2, just keep a meticulous log of hours and persons worked for. The 11yo worked for two old ladies down the street, mowing, weeding, planting bulbs, etc. The little girl dog-walked, pet-sat. The opening accounts were piddling amounts, but that's not the point. Their Roth IRAs are up and running, which I think gets them past that hesitation to tackle paperwork, etc. When they have actual w-2's later, things will be a lot easier for them. BTW, by the nature of their work they do not have to be labelled "self-employed"; they are "domestic" or "household" workers.
best of luck, you are doing a great thing,
hawk
Actually my elder had income in 2016 and lil bit in 2017. I'm just an idiot for not asking this question before. It's only now I'm looking to transfer my IRAs out of TDA, it suddenly hit me.
Also they will have W-2s so no problem there.
I actually also filed a tax return for my elder as well for 2016 and 2017. I want them to understand things I didn't when I was their age.
Let's see how it goes.
Thank you all. You really made my day!
so they don't have to do the work being told 'you will see this summer money in a half-century and boy will it have grown ....'
Another point is to force them to start understanding the real world. My wife has a PhD but refuses to have anything to do with anything related to money. This has been my big problem and I need my kids to take control once I'm gone. I'm trying to make a small start here.
So yeah, I'm going to wait and see how much they earn and then create matching $ Roth IRA for them. I will wait till summer is over and then fund them and assuming I can always add before April 2019 in case they earn something over winter break as well.
My understanding of Roth contributions (so take this with a grain of salt) is that the contribution can not exceed the yearly limit nor can it exceed total earned income.
You can "substitute their money with your money" as far as the funding source for the Roth is concerned, but you can't match there earned dollars with any additional unearned dollars. The term "matching" here should be replaced with a better descriptor. Sounds too much like an employer match program. You're substituting your resources for their resources as the funding source for the Roth.
For 2018 (from the horse's mouth):
https://irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
Not that $5,500 (or less, if the child earns less) comes close to the limit, but this does affect how much extra you can gift without tax implications.
See, e.g. VanguardApril 2016 podcast: "gifting with a Roth ... that's one way to gift assets while using the annual gift-tax exclusion."
You could not have stated it more clearly: "you give the child equivalent amount to make up for it."
Regarding what you "usually do in supporting a child": "Payments for support (paying for food, clothing, shelter, court-ordered child support payments, etc.) for your minor children for which you are legally obligated are not considered gifts."
http://financialanswers.com/page.php?b=24549975-0&c=727
This is nothing more than common sense, formalized. Feeding your children is not a gift. Funding an IRA or a UGMA account, whether directly or indirectly, is.
Just please tell me Turbo Tax will let me figure out all this stuff when I file everyones tax returns.
But if you gift a $5,500 Roth IRA to someone (doesn't have to be a child) today, before you die, then your estate won't get taxed a dime tomorrow since it will only be worth $1M. And that Roth will grow tax-free, assuming the recipient was qualified to have $5500 contributed to the Roth (income under a certain limit, at least $5,500 of compensation.
Turbo tax won't help you with the estate tax, but it could help your executor.
I am pleased to have violated this sort of thing for decades. Child funds Roth ira, you give increased allowance as a reward for child's discipline. Something like that.
Or not.
Incredulous, I did ask a trust and estates attorney, just for kicks. His reply: "You can absolutely put money in a child’s IRA. There is no issue there. In fact I fund my children’s Roth IRA’s each year."
You found a lawyer, I can find a lawyer. Even one with a name who explains things: Just as I wrote above: "Not that $5,500 (or less, if the child earns less) comes close to the limit". But I also added that: "this does affect how much extra you can gift without tax implications."
See if your lawyer will say that there is never an issue putting money in a child's IRA even if you've given the child a $15K gift card the same year. If he changes his story, then recognize that the answer you got was not legal advice, not something you could take to the bank (or to the IRS), but merely an off the cuff remark "just for kicks."
Regarding an "increased allowance as a reward for a child's discipline":
- You said before that the money was gifted to replace money the child used for the IRA; the point of the end result test is that one can't hide gifting of an IRA via this subterfuge of an alternative rationale.
- The attorney appears to have dismissed this as well, noting that you can put money directly in the IRA, thus eliminating not only the excuse for the gift, but the entire two step process. Rather than (a) giving money to child, and (b) child putting money into the IRA, he went right to (c) you putting money into the IRA.
BTW, that increased allowance excuse? That's a gift, too.
"it's worth a mention that there could be federal gift tax consequences to you, as the parent and donor, for an allowance since it's really a gift."
https://www.forbes.com/sites/kellyphillipserb/2013/09/11/back-to-school-if-you-pay-your-kids-an-allowance-do-you-also-pay-uncle-sam
I encourage everyone to return to amounts reality, where this thread started, and read the Forbes article, particularly after the quote here.
>> Also, funding a child's IRA is no different from funding a UGMA - it's a gift, so it counts against your yearly gift tax exclusion.
Say you do not do it directly but in the proper two-step sequence, like there's a difference:
Child earns $5k somehow (dealing drugs, say), child puts that amount in their Roth ira, you "reimburse" (or something --- reward for entrepreneurship?) child for that $5k.
How are you believing that this gets tracked --- by any entity? I do understand you are saying it is not legit.
The attorney you spoke with said: "You can absolutely put money in a child’s IRA. There is no issue there."
No wiggle room there. So that's just plain wrong when it comes to multiple gifts (including the IRA funding) adding up to over $15k ($14K last year). "If you gave gifts to someone in 2017 totaling more than $14,000 (other than to your spouse), you probably must file Form 709. " IRS, Instructions for Form 709.
Here's what I initially wrote, in toto: I didn't try to wriggle out of counting the IRA as a gift by suggesting one give the cash equivalent to the child instead. (It still counts.) I didn't try to wriggle out of the cash being counted as a gift by calling it "allowance". (It's still a gift.)
I didn't try to wriggle out of taxes by suggesting, hey, it doesn't matter because I won't get caught.
In a followup, I showed how this could actually affect people in a state like Oregon where there's "just" a $1M estate tax exemption. In that respect, Massachusetts is like Oregon. Though in the Bay State homes worth more than this million dollar exemption are often the norm.
Note that Mass. treats both gifts and exemptions very differently from federal (and Oregon) law. Perhaps you'd care to comment on how the cliff tax comes into play there even if you've gifted away most of your estate. If not, here's a page that might help:
Explaining the Inexplicable: The Massachusetts Estate Tax and Gifting. That was penned by another lawyer; this time a Boston-based elder law attorney. On that page he also opined: People taking up your suggestion to read in Forbes what follows the sentence I quoted will find in the same paragraph: "If you are gifting those kinds of dollars as an allowance to your kids, consult with your tax professional ."
I think the idea is to consult an attorney or other professional for real answers, not "just for kicks." Sound advice.
Going back to the OP, I (like so many others) was trying to be affirmative to VintageFreak's question about opening Roths for his daughters. Just do it. But sure, paying an attorney is sounder than asking here.
Margolis' comment about not reporting raises an existential question. If a tree falls in the forest .... No, not that one
If a law has no penalty for violating it, is there even a law? My personal answer is yes, and I would file information forms just to keep the record straight.
What Margolis writes in response to a posted question about filing a Mass. estate tax form when no tax is due is that it's a gray area. His firm doesn't file if the estate is well below the $1M threshold, but does file if it's close and the value of some estate assets might be disputed.