Kids Roth IRA #illumedati


Hey everyone, it’s Finance Fridays again. I’ve seen some posts pop up about “Kids Roth IRA” and so I just wanted to talk about it again for a bit.

Kids Roth IRA
These kids with their matching motorcycles need Roth IRAs

Kids Roth IRA

I’ve talked about this before in my previous post, Roth IRA for Kids. I recommend reading that post first as a refresher before reading this post.

In general, the ability to give your child a Roth IRA is absolutely awesome. There is no better way for a young person to start earning compound interest than a Roth IRA at a young age. However, contributing to a Roth IRA for your children is not easy.

There are some strict guidelines in place which make it difficult, namely something called “earned income“.

Normal chores probably do not count.

I must reiterate this – normal chores probably do not count.

I think some people are funding a Roth IRA for their children and paying them for doing their normal household chores. I don’t think this is a good idea. If your CPA allows it or if you’re doing your own taxes — it’ll probably go through just fine. However, if you were ever to get audited, it will probably be a huge hassle with an associated penalty.

I’m not a CPA and I’m not your tax accountant so I can’t tell you what to do. However, I don’t think it’s a good idea.

Oh man, well how can I do this then?

It’s tough.

Child labor laws make it difficult for kids younger than work permit age to make an significant money. Obviously this is for a reason, in order to protect our children. However, it also makes it very difficult to pay them anything.

Here are the ways I’ve seen it done:

You can hire your child to help out at your own business.

They must be paid a reasonable amount for the work they do.

This means that you probably can’t hire your 3 year old to scrub your toilets and pay them a sanitation fee. However, it’s probably reasonable to hire you 7 year old to help you hand out fliers or make copies or something a few hours a week.

What this means, is that in general, it’s exceedingly difficult to hire your child to do any work until they have some degree of autonomy and Independence. The earliest for this is probably 7 or 8 years old. Once again, you’ll need to provide them either a 1099 or a W2 for the money you are paying them.

They can model for your business (or in general)

However, once again, the rates need to be reasonable. Taking one picture of your child and putting it up in your office probably won’t fly.

The rates for these kinds of things will vary, but need to be reasonable/competitive. It may be ok if their picture is on every single business card, memo, and invoice. You probably shouldn’t pay your child a $3000 flat rate a year to use their likeness. Unless, like I said, you were using their likeness everywhere to substantiate that number.

I never really understood why people wanted their kids to model so much. I figured they just wanted them to “get out there” and “be famous”. This is probably still true.

However, if you look at it strictly from a financial perspective, modeling is one of the few jobs where you can make a decent amount of money at a young age. If they are able to book a few gigs a year (and you match it), then that’s a decent amount of money, which you can start at a young age. Unfortunately, getting into modeling isn’t easy and requires continuous time and effort on the part of the parents.

Babysitting and Dogwalking

These are the two major ones. Once your child is responsible enough to start babysitting, they can start making income from these two things. In general, this is usually at least around 12 years old or so.

While it may not seem like much, every little bit counts. Just remember that you can match their earnings as well. For example, let’s say Kylie made $200 a month from a combination of Babysitting and Dogwalking.

$200 x 12 = $2400

We can match up to what she earned, which is $2400. So her Roth IRA would be $4800. This is not quite the cap of $6000, but you could probably get there.

For example, let’s say she made $250/month instead. She would earn $3000 to put toward the Roth IRA, and we could match $3000, capping out her contribution to $6000 for the year.

It might be difficult, but not impossible.

In my previous post, I didn’t mention the matching. However, the ability to match is very helpful. I’m not sure why I didn’t put it in. I think I meant to put it in at the very end, but then forgot. Oh well.

Anything else?

A Roth IRA for your children is a very powerful investing/retirement tool for them. However, I caution people to be very good about documentation and be reasonable with pay.

Don’t be too aggressive. An audit and penalty could potentially wipe out any gains you made from using the Roth IRA in the first place.

TL;DR

Just an update on Roth IRA for your kids.

Remember you can match up to whatever the child makes.

If they make $3000, you can match $3000, and cap them at $6000 for the year.

Don’t be too aggressive. An audit and penalty could potentially wipe out any gains you made from using the Roth IRA in the first place.

Finance Fridays Sensei

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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