Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Funding a child's Roth IRA when they work
Old 04-16-2019, 07:32 PM   #1
Full time employment: Posting here.
The Cosmic Avenger's Avatar
 
Join Date: May 2016
Location: Mid-Atlantic
Posts: 500
Funding a child's Roth IRA when they work

I've thought for years that the best gift we could give our child was a head start on retirement. When they start their first job, I want to encourage them to contribute the first $6K they make per year to a Roth IRA, and give them a cash gift to match whatever they contribute. (Chances are they would not make nearly that anyway since these would be summer jobs, as they are currently a junior in HS.) Basically, put money in a Roth IRA for them by matching whatever they make, although legally it would be their income that would be contributed, we would just make them whole immediately by gifting them a matching amount.

I can't see a downside, but any tax or other implications that I might not have thought of? Financial aid issues? (We have a 529, but not enough to cover all four years, we're planning on getting back to our LBYM roots and paying cash for most of it.)
__________________

__________________
Looking to FIRE in the mid-2020s, which would be our mid-50s.
The Cosmic Avenger is online now   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 04-16-2019, 08:45 PM   #2
Thinks s/he gets paid by the post
dtbach's Avatar
 
Join Date: Apr 2011
Location: Madison
Posts: 1,128
I can't see any downside for the kids. Wonderful thing to do.
__________________

__________________
Wild Bill shoulda taken more out of his IRA when he could have. . . .
dtbach is offline   Reply With Quote
minimum investment amount
Old 04-16-2019, 09:06 PM   #3
Recycles dryer sheets
 
Join Date: May 2017
Posts: 101
minimum investment amount

An issue would be initially opening the account, since fund companies typically require a minimum investment amount to open an account (e.g., $3,000 for many Vanguard funds).

So your child would have to contribute at least $1,500 to get started (and have at least $3,000 of earned income).
RetiredAt55.5 is offline   Reply With Quote
Old 04-16-2019, 09:06 PM   #4
Thinks s/he gets paid by the post
 
Join Date: May 2006
Location: Orlando
Posts: 2,014
And taxpayers with a tax liability and earnings up to a certain amount get a nice bonus from the Feds in the form of the Savers Credit. I helped my niece with the paperwork and some seed money to start a ROTH IRA this year. With a 50% credit at her low income level, she wiped out her tax liability for 2018. Free money!
Buckeye is offline   Reply With Quote
Old 04-16-2019, 09:09 PM   #5
Thinks s/he gets paid by the post
 
Join Date: May 2006
Location: Orlando
Posts: 2,014
Quote:
Originally Posted by RetiredAt55.5 View Post
An issue would be initially opening the account, since fund companies typically require a minimum investment amount to open an account (e.g., $3,000 for many Vanguard funds).

So your child would have to contribute at least $1,500 to get started.
Vanguard will let you open an IRA with $1,000 if you purchase a target retirement fund. I know because I just helped my niece get her first IRA opened. It took almost 3 weeks to get all the paperwork straight and for them to get enough proof that she was who she said she was (young, no credit history). Luckily, we started 6 weeks before tax day.
Buckeye is offline   Reply With Quote
Old 04-16-2019, 09:16 PM   #6
Full time employment: Posting here.
FlaGator's Avatar
 
Join Date: Aug 2008
Location: The 850
Posts: 529
Agree with the idea. Matched the oldestís earnings 1:1 for the last 2 tax years. She hit the max in 2018 and will in 2019.

Have another behind her, and he understands compounded returns
__________________
Stay at home slacker dad since 2015
FlaGator is offline   Reply With Quote
Old 04-17-2019, 06:02 AM   #7
Full time employment: Posting here.
The Cosmic Avenger's Avatar
 
Join Date: May 2016
Location: Mid-Atlantic
Posts: 500
Thanks for the reminders about minimums! I just checked and Fido has a Roth IRA for Kids, it turns out, with no minimums (although it doesn't abrogate any minimum initial investment for individual ETFs or mutual funds).

Buckeye, you actually hit on one of my biggest uncertainties. It occurred to me that the minion will probably make less than $6K this summer, so I wasn't sure how much could be considered EARNED income, and how much would be withheld. That's probably the part where I'm fuzziest. If she made $4K but had $500 in taxes withheld, can that child contribute $3500 or $4K? I suppose you could wait for a refund, then have her put that in the Roth (and possibly match that, too), right?

Also, I've been searching, and I can't find anywhere a clear definition of "earned income" with regards to SS and Medicare tax in particular, because they affect even the lowest earners, I think. It's not a lot, but still, I want to get it right and try to help the kid max out their Roth savings.
__________________
Looking to FIRE in the mid-2020s, which would be our mid-50s.
The Cosmic Avenger is online now   Reply With Quote
Old 04-17-2019, 06:33 AM   #8
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 3,608
Quote:
Originally Posted by The Cosmic Avenger View Post
..............................

Buckeye, you actually hit on one of my biggest uncertainties. It occurred to me that the minion will probably make less than $6K this summer, so I wasn't sure how much could be considered EARNED income, and how much would be withheld. That's probably the part where I'm fuzziest. If she made $4K but had $500 in taxes withheld, can that child contribute $3500 or $4K? I suppose you could wait for a refund, then have her put that in the Roth (and possibly match that, too), right?

Also, I've been searching, and I can't find anywhere a clear definition of "earned income" with regards to SS and Medicare tax in particular, because they affect even the lowest earners, I think. It's not a lot, but still, I want to get it right and try to help the kid max out their Roth savings.
IRS uses a different term........taxable compensation. I think that means for the "simple" case, that it's what you think of as the salary. I believe you're taxed on the whole amount even tho SS/Medicare is taken out so the whole amount could be contributed to Roth if <maximum. Less simple is if you have pre-tax withholdings for 401K .........there you aren't immediately taxed on the 401K withholdings so you could only contribute what was remaining after the pre-tax withholdings.
kaneohe is offline   Reply With Quote
Old 04-17-2019, 06:48 AM   #9
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 3,608
Quote:
Originally Posted by Buckeye View Post
And taxpayers with a tax liability and earnings up to a certain amount get a nice bonus from the Feds in the form of the Savers Credit. I helped my niece with the paperwork and some seed money to start a ROTH IRA this year. With a 50% credit at her low income level, she wiped out her tax liability for 2018. Free money!
The Savers Credit is a great thing so don't miss it if you're eligible.
Unfortunately it probably won't work in the OP's case. Right at the top of the form for claiming the credit: (might be 3 strikes here)

You cannot take this credit if
ē The person(s) who made the qualified contribution or elective deferral (a) was born after January 1, 2001; (b) is claimed as a
dependent on someone elseís 2018 tax return; or (c) was a student (see instructions)
kaneohe is offline   Reply With Quote
Old 04-17-2019, 07:18 AM   #10
Recycles dryer sheets
 
Join Date: Oct 2017
Posts: 165
I did this for a couple years for both kids a few years ago when they were working in High School. No regrets, it got them both started and I set them up with a monthly EFT as soon as they started working full time. A painless way to start.


The mistake I made was using a Financial Planner. He set them up in front loaded funds with a 5% sales charge......I learned and switched them to Vanguard, Target Fund 2065. I would not object to a 100% stock fund such as Total Stock Index or S&P 500, but I wanted something that I could tell them to "set and forget" and it will adjust accordingly as they get closer to withdrawing the funds.
Stormy Kromer is offline   Reply With Quote
Old 04-17-2019, 07:42 AM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 7,943
I don't believe the Roth itself is considered as an asset in financial aid, but their wage income is. Also, it's possible your gift of the money for the Roth would also be considered as income.
RunningBum is offline   Reply With Quote
Old 04-17-2019, 07:44 AM   #12
Full time employment: Posting here.
The Cosmic Avenger's Avatar
 
Join Date: May 2016
Location: Mid-Atlantic
Posts: 500
Quote:
Originally Posted by kaneohe View Post
The Savers Credit is a great thing so don't miss it if you're eligible.
Unfortunately it probably won't work in the OP's case. Right at the top of the form for claiming the credit: (might be 3 strikes here)

You cannot take this credit if
ē The person(s) who made the qualified contribution or elective deferral (a) was born after January 1, 2001; (b) is claimed as a
dependent on someone elseís 2018 tax return; or (c) was a student (see instructions)
Yes, they hit all three disqualifying factors! Thanks, kaneohe!

A lot of things to think about in this thread. I may have to do some research! (Normally I just figure it out as I go through trial and error, like adjusting withholding or reading IRS pubs on certain credits or deductions.)
__________________
Looking to FIRE in the mid-2020s, which would be our mid-50s.
The Cosmic Avenger is online now   Reply With Quote
Old 04-17-2019, 07:45 AM   #13
Recycles dryer sheets
 
Join Date: Mar 2017
Posts: 167
Quote:
Originally Posted by The Cosmic Avenger View Post
I can't see a downside

Potential downside I see is that you and they are locking that money away in a retirement vehicle, inaccessible without penalties. You are starting to build their retirement savings account, but perhaps the best way to support eventual retirement is investment at this age rather than saving. Money that could go to college, or grad school, or pay of loans for either, or a down payment on a first home, or purchase of a first car without a loan, all could be wise investments.


My high school and college summer jobs paid for my first car, and contributed to my first home down payment, I was certainly glad to have that money accessible in my 20s. It costs some real money to get your feet under you and running in life.
mrWinter is offline   Reply With Quote
Old 04-17-2019, 07:47 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
sengsational's Avatar
 
Join Date: Oct 2010
Posts: 5,354
I did that with both of my kids' assistanceship wages when they were in college. Schwab had a $500 minimum at the time.
sengsational is offline   Reply With Quote
Old 04-17-2019, 07:53 AM   #15
Recycles dryer sheets
TrophyWife's Avatar
 
Join Date: Feb 2016
Posts: 141
We do this!
TrophyWife is offline   Reply With Quote
Old 04-17-2019, 08:03 AM   #16
Recycles dryer sheets
 
Join Date: Mar 2013
Posts: 196
This is a fantastic idea. It never occurred to me to do this. This is something I would like to do too. If a kid has a Roth, does it affect their college financial aid since it's their asset? I don't think we will qualify for aid anyway, so it's probably moot.
hausfrau is offline   Reply With Quote
Old 04-17-2019, 08:05 AM   #17
Confused about dryer sheets
 
Join Date: Aug 2018
Posts: 3
Quote:
Originally Posted by The Cosmic Avenger View Post
Thanks for the reminders about minimums! I just checked and Fido has a Roth IRA for Kids, it turns out, with no minimums (although it doesn't abrogate any minimum initial investment for individual ETFs or mutual funds).

Buckeye, you actually hit on one of my biggest uncertainties. It occurred to me that the minion will probably make less than $6K this summer, so I wasn't sure how much could be considered EARNED income, and how much would be withheld. That's probably the part where I'm fuzziest. If she made $4K but had $500 in taxes withheld, can that child contribute $3500 or $4K? I suppose you could wait for a refund, then have her put that in the Roth (and possibly match that, too), right?

Also, I've been searching, and I can't find anywhere a clear definition of "earned income" with regards to SS and Medicare tax in particular, because they affect even the lowest earners, I think. It's not a lot, but still, I want to get it right and try to help the kid max out their Roth savings.

We do this as well.
Taxes donít impact their earned income. I just look at the last paystub for the summer and then deposit that amount in the Roth.
No issues so far.
onabreak is online now   Reply With Quote
Old 04-17-2019, 08:11 AM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 7,943
Quote:
Originally Posted by mrWinter View Post
Potential downside I see is that you and they are locking that money away in a retirement vehicle, inaccessible without penalties. You are starting to build their retirement savings account, but perhaps the best way to support eventual retirement is investment at this age rather than saving. Money that could go to college, or grad school, or pay of loans for either, or a down payment on a first home, or purchase of a first car without a loan, all could be wise investments.


My high school and college summer jobs paid for my first car, and contributed to my first home down payment, I was certainly glad to have that money accessible in my 20s. It costs some real money to get your feet under you and running in life.
It's a lot less restrictive than you think. You can withdraw contributions at any time, and you can withdraw up to $10K for your first home down payment, and in cases of disability.

https://www.schwab.com/public/schwab...thdrawal_rules
is a good summary of when you can withdraw earnings penalty free, and in some cases tax free.

Essentially one can "loan" a Roth IRA the funds to grow for retirement, and then withdraw the principal and let the earnings continue to grow for retirement. That helps you get a start on retirement while leaving money accessible for your 20s. It's especially helpful when a parent or grandparent gifts the youngster the funds for the contributions. I'm doing this for my son.
RunningBum is offline   Reply With Quote
Old 04-17-2019, 08:15 AM   #19
Full time employment: Posting here.
The Cosmic Avenger's Avatar
 
Join Date: May 2016
Location: Mid-Atlantic
Posts: 500
Quote:
Originally Posted by onabreak View Post
We do this as well.
Taxes donít impact their earned income. I just look at the last paystub for the summer and then deposit that amount in the Roth.
No issues so far.
So you funded the Roth with a direct transfer from your own account? I wonder if that could trip you up if the IRS decided to be picky. I mean, that's probably what I would normally do, but I wonder if I should transfer our funds to their savings account, then from there to their Roth IRA. (I do manage their account for them at the moment as is their preference, although I've given them a card and online access.)
__________________
Looking to FIRE in the mid-2020s, which would be our mid-50s.
The Cosmic Avenger is online now   Reply With Quote
Old 04-17-2019, 08:18 AM   #20
Full time employment: Posting here.
The Cosmic Avenger's Avatar
 
Join Date: May 2016
Location: Mid-Atlantic
Posts: 500
Quote:
Originally Posted by mrWinter View Post
Potential downside I see is that you and they are locking that money away in a retirement vehicle, inaccessible without penalties. You are starting to build their retirement savings account, but perhaps the best way to support eventual retirement is investment at this age rather than saving. Money that could go to college, or grad school, or pay of loans for either, or a down payment on a first home, or purchase of a first car without a loan, all could be wise investments.


My high school and college summer jobs paid for my first car, and contributed to my first home down payment, I was certainly glad to have that money accessible in my 20s. It costs some real money to get your feet under you and running in life.
Well, remember, this is a "bonus" we're giving them. They can still do that with the money they earn, we're just matching it to fund the Roth IRA. And we might still help them with those other things; we're planning on paying for at least undergrad without loans, or if there is a loan, to only use it as a convenient bridge for ourselves and pay it off for them.
__________________

__________________
Looking to FIRE in the mid-2020s, which would be our mid-50s.
The Cosmic Avenger is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
If theyíre not working, bottom line is they donít want to work 97guns Other topics 58 12-10-2017 09:35 AM
Funding Roth IRA after retirement martyb FIRE and Money 11 11-21-2013 01:20 PM
Roth IRA contribution for child/retiree BigBob FIRE and Money 7 09-10-2007 12:26 PM

» Quick Links

 
All times are GMT -6. The time now is 03:05 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2019, vBulletin Solutions, Inc.