just read an article in "Costo Connetction" (published by Costco). A reader was asking a question (how to invest) about his granddaughter of 15 yrs old that already has $20k in Roth IRA.
I didn't know kids can open a Roth IRA account !! my kids already have 529. is it better off keep investing in 529 ? or is it better to open a new Roth IRA account ? what are the advantages and disadvantages ?
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This should be addressed in the Beginner sticky... But...
A Roth for a kid is great. It has a lot more flexibility for withdrawals... 529s can only be used for education (although they can be transferred to someone else if the current beneficiary doesn't go to college). The principal (original contribution) can be withdrawn at any time penalty free on a Roth.
The rub is that the kid has to have earned income. The Roth can only be funded to the extent that the child has real earned income. The income can be lawnmowing, garage cleaning, or whatever. The kid must file for taxes.
If you want to GIFT money to a child, you can gift the kid a dollar for dollar match (or whatever) and use the gift money to fund the ROth, but only up to the extent of earned income.
Under current financial aid rules, a Roth does not count against you in the college financial aid evaluation.
I just want to make sure you are not talking about Educational IRA (Education Savings Acct) ? which has lower limit ($2k).
Roth IRA sounds like a better deal than 529 then !! how come everyone is pushing 529 ?
since you don't have to pay tax if you make only $2k per year(pls correct me here). so I can give me kid $2k salary for being good (or whatever). then contribute $2k to match. then my kid can contribute $4k to his Roth IRA? this sounds better than Educational IRA or 529. so what's the catch?
my kids already have Education IRA and 529, can they open Roth IRA on top of those? thanks !!
Hold the phone! The Roth contribution can only be up to the amount of EARNED INCOME. If Jr. makes $2K sweeping floors, then he can contribute only $2K to the Roth. The matching part comes from the Bank of Mom and Dad IF they want... Some folks do some sort of match that way... Jr. gets bored working for money he doesn't see... That way, Jr. takes his earned money (he sees it) and does whatever with it. Mom / Dad GIFT him the same amount (or whatever you want to do) and that money goes into the Roth if desired. The matching part is completely up to you.
I'm not sure what a kid can earn without paying taxes, but I think it's more that $4K. The max Roth contribution per year is $4K for 2006 and 2007 for those under 50 years old.
I think the Roth is way better than the 529, and agree a lot of people are pushing the 529 too much.
The earned income has to be real. You have to pay reasonable wages for real work. And... again... You have to file taxes. It's not real earned income for a Roth unless Jr. files a tax return.
so if I got this right. to get to maximum of $4k for Roth IRA:
1. JR. make $4k earned income. then contribute all $4k into Roth IRA.
or
2. JR. make $2k earned income. and put $2k in Roth IRA. Parent then can match that and put in additional $2k into JR. Roth IRA ?
just trying to think of a "way" to put all $4k into Roth IRA. My kid is only 3 and 4. not sure what is a fair wage is wage called allowance? how would you do it?
edited I read the link by DreamKrusher. kids have to be 7 or older.
bellwilliam said:so if I got this right. to get to maximum of $4k for Roth IRA:
1. JR. make $4k earned income. then contribute all $4k into Roth IRA.
or
2. JR. make $2k earned income. and put $2k in Roth IRA. Parent then can match that and put in additional $2k into JR. Roth IRA ?
just trying to think of a "way" to put all $4k into Roth IRA. My kid is only 3 and 4. not sure what is a fair wage is wage called allowance? how would you do it? You're still misunderstanding the rules heavily. You can ONLY put it as much money into a Roth IRA as that individual earned in taxable wages. What you CAN do would be hypothetically have the kid earn 2,000 dollars which is not put in a Roth IRA, and then you then put in 2,000 dollars of your own money into the Roth IRA in the kid's name. The IRS doesn't really care about the exact source of the money invested as long as that person earned enough in taxable wages.
With the kid currently only 3 or 4, I doubt there is any way you can really do this right now. You could try, but I'd be very worried about the IRS happening to do an audit and deciding the wages you paid don't pass the smell test. The IRS has to be persuaded that the kids legitimately earned the money or they will view this as simply attempted tax evasion trying to exploit the Roth IRA loophole. While I'll let more experienced people chime in here, I suspect that if you something like this right now you're effectively simply gambling that the IRS won't catch you. (Once the kids are older you may have more options on how to do this.)
Edit: One extremely important point here. It ONLY counts for a Roth IRA if the money was earned working. Income for investments does not count at all with regards to income which can count for either a traditional or Roth IRA. (Simply being taxable income is not enough.)
bellwilliam said:so if I got this right. to get to maximum of $4k for Roth IRA:
1. JR. make $4k earned income. then contribute all $4k into Roth IRA.
or
2. JR. make $2k earned income. and put $2k in Roth IRA. Parent then can match that and put in additional $2k into JR. Roth IRA ?
#1. Yes.
#2. No.
Mordoch already explained this very well, but let me give a more concrete example: JR makes $2k in earned income. JR. spends the $2k buying the latest Playstation game on eBoy. Parents can give JR $2k to put into IRA. But total contributions to IRA from all sources cannot exceed $2k.
Remember also that if JR paid $160 in Social Security taxes so his take-home pay was only $1840, he (or someone else) can still put $2k into his IRA.
Mordoch already explained this very well, but let me give a more concrete example: JR makes $2k in earned income. JR. spends the $2k buying the latest Playstation game on eBoy. Parents can give JR $2k to put into IRA. But total contributions to IRA from all sources cannot exceed $2k.
Remember also that if JR paid $160 in Social Security taxes so his take-home pay was only $1840, he (or someone else) can still put $2k into his IRA.
This explanation is correct. I have matched my son's earnings $ for $ ever since he started working. Last year he made ~ $1780 of which he saved ~ $0. I "gifted" him $1780 which he put into his ROTH IRA. This year he made approximately $3000 and I will "gift" him $3000 to put into his ROTH IRA. I plan on doing this until he is 21. It's one way I chose to help him learn the value of investing and planning for the future.
SIDE NOTES: Starting next year he will also be saving 10% of his bring home for an emergency fund. He already knows about Fatwallet and it's benefits. He checks with me about the latest deals on any items which he wishes to purchase.
You must be talking about Education IRA, had been named under Roth IRA years ago. at least, at time (1998~1999) I opened the IRA account for my kids. The account was named "Roth IRA". The account is renamed as "Education IRA". But I still believe the Roth IRA for kids is Education IRA.
Go Education(Roth) IRA for your kids. It's best investment for kids, as I know.
I started it a while ago. (was $500 contribution a year by parents or anyone. now is $2k a year). I mainly trade stocks for them in the accounts. Now I am happy what I have done for them.
The money in your kids' Roth IRA could be used for their education. The only drawback, if it exists, is your kids mostly have to use that money first. Sometimes, your kids are talented enough for scholarship. But possibly they will lose it because your kids have money (Roth IRA) under their names.
siliconbeaver said:You must be talking about Education IRA, had been named under Roth IRA years ago. at least, at time (1998~1999) I opened the IRA account for my kids. The account was named "Roth IRA". The account is renamed as "Education IRA". But I still believe the Roth IRA for kids is Education IRA.
Go Education(Roth) IRA for your kids. It's best investment for kids, as I know.
I have never heard of an Educational ROTH IRA. While they can use funds from the ROTH for educational purposes, a ROTH is a ROTH no matter whether it is for a kid or an adult.
siliconbeaver said:Then you must be too late to open the Roth account. As said, I started it 1998~1999. For education purpose only.
BTW, why not google "roth education ira". easy to get answer.
I'm not arguing with you ...I'm just not aware or a "roth educational ira" (which I googled). The first hit said:Roth and Education IRAs The Taxpayer Relief Act of 1997 signed into law earlier this year creates two new categories of Individual Retirement Accounts (IRAs), the Roth IRA and the Education IRA.
Contributions to Roth IRAs are nondeductible, however distributions from a Roth IRA after age 591/2 (and distributions for other qualified purposes) will not be includable in gross income. Thus, a Roth IRA allows an individual to create a tax-exempt retirement account that is not subject to income tax when funds are withdrawn. An individual can contribute up to $2,000 per year to the account, less any amounts contributed to other IRAs. The Roth IRA is not available to all taxpayers. Contributions are phased out for joint filers with gross income in excess of $150,000 and single filers with gross income in excess of $95,000. Rollovers from regular IRAs to Roth IRAs are available to taxpayers with gross income of less than $100,000. Income tax must be paid on the rollover amount, but there is no penalty tax for early withdrawal, and subsequent distributions from the Roth IRA will not be taxed.
An Education IRA allows an individual to contribute up to $500 per year to a tax free account if distributions from the account are used exclusively for qualified higher education expenses of the designated beneficiary of the account. The amount that can be contributed to an Education IRA is phased out for taxpayers with gross incomes in excess of $95,000 or $150,000 for joint filers.
Subsequent hits talk about ROTH AND Educational IRAs as different instruments.
Education IRA is now called Education Savings Account. http://www.schwab.com/public/schwab/home/account_types/college_custodial/education_savings maximum per year is $2k. and you can start with your newborn
Roth IRA is like what these experts said. $4k maximum/yr (more if you are over 50), but you must have at least that much earned income. that's the catch !! good thing is you can withdraw Roth IRA early (with no penalty) to use for higher education.
just read this. author is saying paying kids to do housework, is not going to cut it.
I guess JR. have to have a real job !!!Fairmark is a good site, and it does a good job of explaining a lot of noncontroversial tax rules. Unfortunately, on a number of issues, he takes ultra-conservative positions, which is a perfectly fine thing to do, but applies them to areas of the law which are hazy, without being clear that there's room for disagreement.
The IRS would have some reasonable chance for success if they ever decided to go to court on this issue, but I don't think that's ever going to happen (for one thing, because it would establish a precedent that a large category of income isn't taxable). If they did win, their chance of getting any kind of penalty is basically nil: a judge is just not going to hold you responsible for treating intra-family payments as taxable income, when there's nothing in writing that says they aren't, and Congress has told us that it's taxing "income from whatever source derived." You're not going to be punished for not taking the same logical leap as Fairmark.
The kids' income has to be real, legitimate and fair, and remember that IRAs are the kids' money; but if you're paying a fair price for housework, and treating it consistently for tax purposes (including filing returns for the kids, if necessary), I'd feel reasonably OK with using that as justification for an IRA contribution. And, to be clear: I'm taking a somewhat aggressive position here with which there's plenty of room to disagree.
frootmall said: Remember also that if JR paid $160 in Social Security taxes so his take-home pay was only $1840, he (or someone else) can still put $2k into his IRA.
If Jr is under 18, then he shouldn't have to pay Social Security, Medicare or state unemployment/disability taxes and his employer (you) do not need to send in any match (SS/Medicare)either.
debentureboy said: The earned income has to be real. You have to pay reasonable wages for real work. And... again... You have to file taxes. It's not real earned income for a Roth unless Jr. files a tax return.
The child may not owe or even need to file a federal tax return if the earned income was $5000 or less (2006) (See IRS publication 929) and the child did not have any unearned income.
One of the drawback is they could take this money at age 18 and withdraw it to buy a sportscar, etc) because it is their money. Of course there may be penalties, taxes, etc. However, the kid may not care as long as the sports car is shiny and fast.
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is wage called allowance? how would you do it?
