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Create a business to fund relative's kid
Old 01-12-2020, 10:04 AM   #1
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Create a business to fund relative's kid

I was reading this article:
https://www.marketwatch.com/story/th...ver-2018-06-04

And was wondering if I can do something nice for my niece by hiring her and get her to start Roth IRA as young as possible. She is at age 2 now so I have a few years to get things planned out.

My current plan has the following steps:
1. (Me) creat a sole proprietor business and get a tax ID.
2. (Her parents) create a custodian Roth IRA account for her.
3. (Me) pay her $6k/yror whatever the max R.IRA annual contribution is.
4. (Her parents) out the money in her R.IRA account annually.

Is there any issue with this plan?
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Old 01-12-2020, 11:17 AM   #2
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Sounds like it is dancing with fraud to me.
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Old 01-12-2020, 11:47 AM   #3
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Sounds like it is dancing with fraud to me.
My understanding is that there needs to be an actual activity involving the child working in some capacity. You cannot just pay a wage to a child if there is no actual work.

So when she is 10 or so can she run the copy machine or file some papers. Or can she star in a video commercial for your company. The wage has to be reasonable so filing could pay $10-$15 an hour and acting in your commercial could pay much more. You can't just call her your Executive Assistant and pay her $5500.
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Old 01-12-2020, 12:10 PM   #4
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From Investopedia, https://www.investopedia.com/open-a-...-else-4770855:

The Earned Income Requirement for Roth IRAs
"Still, you have to be very, very careful if you help fund an IRA for a minor child. Why? Because anyone with a Roth IRA must have earned income during the year that a contribution is made to the account.

That earned income can come from part-time jobs like babysitting or working at the grocery store. Odd jobs are okay, too, but the wages have to be reasonable. $25 to weed the garden? Sure. But you can't get away with paying your grandkids $1,000 to mow the lawn."
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Old 01-12-2020, 02:31 PM   #5
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In my original post I was just thinking about the logistics. It is not my intention to gift money to my niece without her doing some work.

I don't yet know the specific work to have her do. Possibly various tasks at different age. The full contribution amount for R. IRA is the goal but it does not have to be and the compensation will be at market rate. It would be useful enough just to teach her the ethics and value of work (help out in the house, computer data entry, lemonaid stand, later cut the grass, walk the dog, etc) as early as she can so she does not get used to have allowances.

I never owned a business so I was just trying to get the basics right. Perhaps it would sound more legit if I have a marketable idea like what they have on Etsy but so far I only have house chores in mind.
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Old 01-12-2020, 02:43 PM   #6
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You seem like a concerned Aunt/Uncle but I don't think a Roth is the correct vehicle for what you have in mind. Have you had any discussions with her parents about your idea?

The concept of putting something away for her future is wonderful, I might bring her parents into the loop.
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Old 01-12-2020, 03:00 PM   #7
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That earned income can come from part-time jobs like babysitting or working at the grocery store. Odd jobs are okay, too, but the wages have to be reasonable.
Would the child need to file taxes showing the income for the year the Roth contribution was made?
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Old 01-12-2020, 03:07 PM   #8
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As long as the OP and the parents made a good faith effort to follow the rules, like being able to show a contemporaneous file with the relevant IRS regs copied and highlighted, IMO the worst case would be that IRS would bust the deal on audit. What is the probability of an audit? Slightly lower than hell freezing over to create a landing strip for flying pigs.
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Old 01-12-2020, 03:39 PM   #9
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Would the child need to file taxes showing the income for the year the Roth contribution was made?
There's that, plus the need to pay social security and medicare taxes on the earnings.
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Old 01-12-2020, 04:03 PM   #10
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Originally Posted by teetee View Post
My current plan has the following steps:
1. (Me) create a sole proprietor business and get a tax ID.
2. She creates a sole proprietor business. Using her SS# is fine.
3. She sends you an invoice for services.
4. You pay her as a 1099.
5. She handles her own Schedule C, taxes and Roth.

It is not the most efficient method as she will pay self-employment taxes.
But, 50 years from now, who cares.
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Old 01-12-2020, 04:38 PM   #11
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Sounds like it is dancing with fraud to me.
That's what it looks like, yes. So far I haven't seen mention of any real economic activity and compensation therefor.
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Old 01-12-2020, 04:40 PM   #12
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I think racy hit the nail on the head.
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Old 01-12-2020, 05:48 PM   #13
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I have heard people paying their kids for modeling for their website. I think that's more of a gray area as to what is fair then weeding the flower bed.

On the other hand you could just wait until the kid has a real job and then start funding the Roth for them for a few years. If they make a grand at McDonalds then throw a grand into the Roth. No possibility of fraud doing it that way.
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Old 01-12-2020, 05:48 PM   #14
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An acquaintance of mine told me recently that he hires his child as an actor in adverts for his company. The child does everything a child actor from an agency would do, so he believes this is legitimate. Then he funds an IRA for the child with the wages.

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Old 01-12-2020, 10:36 PM   #15
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There needs to be actual wages with taxes taken out (federal, state, local, Medicare and Social Security). Or, income reported on a 1099. If the child is paid for lawn mowing, babysitting, etc., with good record-keeping, that money can be contributed to a Roth IRA. You could gift the amount they actually earn to fund the Roth IRA. But that child needs to be paid. A 1099 would need to be filed, and an income tax return filed.

Also, the Roth IRA would be a custodial Roth IRA and legally becomes your niece’s money at age 18.

If you want to help a 2 year old financially, why not open a 529 plan with the child as the beneficiary instead? You control the money and can change the beneficiary if the child becomes a drug addict and drops out of school.
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Old 01-13-2020, 06:17 AM   #16
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Would the child need to file taxes showing the income for the year the Roth contribution was made?
Well, they wouldn't need to file unless their income was more than the standard deduction, now $12K. (I checked for my kid.) But teetee would need to issue a W-2 and deduct SS and Medicare taxes, as GrayHare said.
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Old 01-13-2020, 08:42 AM   #17
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Sounds like it is dancing with fraud to me.
+1
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Old 01-13-2020, 04:55 PM   #18
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Another point. I am trying to imagine what would have happened if a relative told my kids that the kids needing to work for them .... but 100% of the money paid was going into retirement funds. That...would not have gone over well.

I mean, sure, this is good and all. But if she does work for you, then she giving up her time to do work and not receiving the benefit of anything she will see for probably half a century. I am not seeing why any kid would want to do that. In other words, I think she would want to reap some of the benefits right now rather than 50 years from now.
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Old 01-13-2020, 05:26 PM   #19
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Another point. I am trying to imagine what would have happened if a relative told my kids that the kids needing to work for them .... but 100% of the money paid was going into retirement funds. That...would not have gone over well.

I mean, sure, this is good and all. But if she does work for you, then she giving up her time to do work and not receiving the benefit of anything she will see for probably half a century. I am not seeing why any kid would want to do that. In other words, I think she would want to reap some of the benefits right now rather than 50 years from now.
Good point. I would hope that the proposal is really to pay them for work done, and also gift them a matching amount to go into a Roth. Otherwise, yeah, at 12 years old I wouldn't have been too happy to mow lawns for a number on a piece of paper.
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Old 01-13-2020, 05:38 PM   #20
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Originally Posted by The Cosmic Avenger View Post
Well, they wouldn't need to file unless their income was more than the standard deduction, now $12K. (I checked for my kid.) But teetee would need to issue a W-2 and deduct SS and Medicare taxes, as GrayHare said.
Note that the requirements to file a tax return differ if the child can be claimed as a dependent, which most children can be. To determine whether a child needs to file a tax return, they generally need to look at Chart B in the instructions, not Chart A.

Also, if the child is employed doing household chores for their parents, I believe SS and Medicare taxes are not required to be paid on that income.
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