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Re: Opening a kid's Roth IRA
Old 06-03-2005, 09:32 PM   #21
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Re: Opening a kid's Roth IRA

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Originally Posted by KB
I opened a Roth IRA for my 16 yo son a few years ago with Vanguard.* Because of something I had read, I sent in my son's taxes showing 2400.00 income without a W-2 or any specific employer, and with the 2400.00 Roth IRA purchase.* *Since the 2400.00 is below what is required to submit to IRS, they sent me a nice postcard reply telling me that the income was too low to file and that we didn't need to file again with that level of income.

And that was that !!* It was easier than I thought.
Ignorance is bliss.* The IRS only said $2400 of income is lower than the minimum threshold to file.* They didn't validate everything else you stated.* That may not be that.
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Re: Opening a kid's Roth IRA
Old 06-04-2005, 12:26 PM   #22
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Re: Opening a kid's Roth IRA

OH.......
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Re: Opening a kid's Roth IRA
Old 06-04-2005, 12:36 PM   #23
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Re: Opening a kid's Roth IRA

Call the IRS 800#. They'll put you in touch with a nice irs agent that will answer your questions. Get his name and ID number and write down what he says, the date, time and his ID info.
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Re: Opening a kid's Roth IRA
Old 06-04-2005, 02:17 PM   #24
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Re: Opening a kid's Roth IRA

Here is the IRS publication on when you must file a return for a kid: http://www.irs.gov/pub/irs-pdf/p929.pdf

If all the income is earned income, the 2004 cutoff was $4850.

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Re: Opening a kid's Roth IRA
Old 06-04-2005, 02:46 PM   #25
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Re: Opening a kid's Roth IRA

I have a couple of thoughts on all of this. First, I'll bet that whether a ROTH IRA contribution can be based on income earned by a child from household chores, in contrast to income earned from a family business, is a gray area. No one ever seems to withhold income tax from wages paid to children for chores. Common sense (is there such a thing?) tells us that it really isn't taxable income. Therefore, the IRS could argue that either (1) it isn't income so no Roth contribution is allowed or (2) it is income, so where is your withholding, w-4 and w-2?

So I would guess there is a risk here. You might have a W-4 filed out, saying "exempt" (though I am not sure the income is exempt from withholding in the first year of employment) and issue a W2 showing no withholding.


As mentioned earlier, no worry about FICA etc.

Isn't it odd this has to be so complicated? I guess that is why it is uncommon.
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Re: Opening a kid's Roth IRA
Old 06-04-2005, 03:12 PM   #26
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Re: Opening a kid's Roth IRA

Quote:
Originally Posted by Martha
No one ever seems to withhold income tax from wages paid to children for chores.* Common sense (is there such a thing?) tells us that it really isn't taxable income.* Therefore, the IRS could argue that either (1) it isn't income so no Roth contribution is allowed or (2) it is income, so where is your withholding, w-4 and w-2?
*
So I would guess there is a risk here.* You might have a W-4 filed out, saying "exempt" (though I am not sure the income is exempt from withholding in the first year of employment) and issue a W2 showing no withholding.
Why are you so caught up with the withholding thing?* Who said you have to have withholdings on W-2 income?
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Re: Opening a kid's Roth IRA
Old 06-04-2005, 03:54 PM   #27
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Re: Opening a kid's Roth IRA

I'm not so caught up in the withholding because the kid shouldn't have to pay taxes anyway and might not even need to file a return. The issue I raised is whether income from household chores supports a Roth IRA and that is what I think might be a gray area.
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Re: Opening a kid's Roth IRA
Old 06-04-2005, 04:36 PM   #28
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Re: Opening a kid's Roth IRA

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The issue I raised is whether income from household chores supports a Roth IRA and that is what I think might be a gray area.*
Money given to your child for performing houshold chores is considered a gift and does not qualify as earned income and therefore can not be considered for any retirement plan for the child.
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Re: Opening a kid's Roth IRA
Old 06-04-2005, 04:37 PM   #29
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Re: Opening a kid's Roth IRA

Quote:
Originally Posted by retire@40
Money given to your child for performing houshold chores is considered a gift and does not qualify as earned income and therefore can not be considered for any retirement plan for the child.
And your specific reference for that would be...?
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Re: Opening a kid's Roth IRA
Old 06-04-2005, 05:18 PM   #30
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Re: Opening a kid's Roth IRA

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And your specific reference for that would be...?
It's called the smell test.

If you are prepared to make a case that you as the parent are the employer and your child is the employee, you better be ready to answer how you arrived at amount of compensation paid, documented by time sheets, quarterly payroll tax returns including year-end summaries, and all the other requirements of an employer.

You may also want to be prepared to explain any birthday and Christmas "gifts" that you gave your "employee" that could now be considered diguised compensation along with all the other benefits that were "given" to your employee that were not properly documented.

By the way, if your next* door neighbor pays the exact same amount to his child who is the same age as your child for the exact same work, is he committing fraud because he didn't file all his payroll reports?

Payment for household chores is NOT earned income for your child!
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Re: Opening a kid's Roth IRA
Old 06-04-2005, 05:50 PM   #31
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Re: Opening a kid's Roth IRA

I did a quick check (so I might have missed something) but I see no revenue rulings or pubs on the issue of "chores". How about this for an argument. If the chore is something people often hire others to do, money from it is earned income. If the chore is something people rarely are hired for, then it is not earned income. For example, mowing lawn=earned income. Setting the table=not.


Just a thought. No one wants to be the test case.
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Re: Opening a kid's Roth IRA
Old 06-04-2005, 06:03 PM   #32
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Re: Opening a kid's Roth IRA

Here is the pub on when withholding is required. Note the kid might be exempt from withholding if no tax paid prior year and no unearned income. If unearned income, such as interest income, you will have to withhold income taxes for work in a family business. http://www.irs.gov/pub/irs-pdf/p505.pdf



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Re: Opening a kid's Roth IRA
Old 06-04-2005, 06:33 PM   #33
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Re: Opening a kid's Roth IRA

Quote:
Originally Posted by Martha
I did a quick check (so I might have missed something) but I see no revenue rulings or pubs on the issue of "chores".* How about this for an argument.* If the chore is something people often hire others to do, money from it is earned income.* If the chore is something people rarely are hired for, then it is not earned income.* For example, mowing lawn=earned income.* Setting the table=not.

Just a thought.* No one wants to be the test case.*
The only way paying your child as an employee will work is if you have a business and he or she is doing real work in your business.* The business has to be real and must have a profit motive.* You must file a schedule C or other business tax return, and the work done by your child must actually be performed, and reasonable compensation for that work must be paid.

If you want to set up a legitimate landscaping business and pay your child as an employee for mowing the lawn, that would work.
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Re: Opening a kid's Roth IRA
Old 06-04-2005, 06:35 PM   #34
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Re: Opening a kid's Roth IRA

Our resident lawyer just said there are no pertinent rulings or documents for this.

Is this your opinion or is there some factual basis for the statement?
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Re: Opening a kid's Roth IRA
Old 06-04-2005, 06:38 PM   #35
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Re: Opening a kid's Roth IRA

Quote:
Originally Posted by Martha
If unearned income, such as interest income, you will have to withhold income* taxes for work in a family business.
What does unearned income have to do with any withholdings on earned income from a family business? *If the child makes $100 in interest income and gets a W-2 with $100 gross income from a family business, there need not be any withholdings.

You only need to withhold when certain income threshholds are met.
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Re: Opening a kid's Roth IRA
Old 06-04-2005, 06:48 PM   #36
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Re: Opening a kid's Roth IRA

My oldest son earned money from babysitting and mowing lawns, splitting wood and other odd jobs for other people. And that money was used to open his Roth IRA. Not from any work he did for me. So where does that fit in relation to this thread?
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Re: Opening a kid's Roth IRA
Old 06-04-2005, 07:18 PM   #37
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Re: Opening a kid's Roth IRA

Quote:
Originally Posted by retire@40
What does unearned income have to do with any withholdings on earned income from a family business? If the child makes $100 in interest income and gets a W-2 with $100 gross income from a family business, there need not be any withholdings.

You only need to withhold when certain income threshholds are met.
I was too definate about saying any unearned income, but it does take very little unearned income to make it so that you are not in the position of being able to claim an exemption from withholding. Read pub 505, the link is above. Look at worksheet 1.4.
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Re: Opening a kid's Roth IRA
Old 06-04-2005, 07:37 PM   #38
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Re: Opening a kid's Roth IRA

Quote:
Originally Posted by retire@40
The only way paying your child as an employee will work is if you have a business and he or she is doing real work in your business. The business has to be real and must have a profit motive. You must file a schedule C or other business tax return, and the work done by your child must actually be performed, and reasonable compensation for that work must be paid.

If you want to set up a legitimate landscaping business and pay your child as an employee for mowing the lawn, that would work.
Since there are no rulings on this issue, I will give you a counterargument. You know that the basic theory of the IRC is that income from all sources is taxable, unless there is a specific exemption. Therefore, to be technical, if you hire your 13 year old daughter to mow the lawn and pay your child, the income is subject to tax. Doesn't matter if you have a bona fide business or not. The tax code only cares about income. Now everyone believes this really isn't true, even though the tax code literally would make it true.

Now only bona fide businesses get to deduct the wages paid to the child. Because you don't have a business, mom and dad can't deduct the wages paid.

The next issue is whether the money paid is "compensation" for the purposes of a Roth IRA. This publication defines compensation: http://www.irs.gov/pub/irs-pdf/p590.pdf
See page 7. It includes earnings from self employment (the child arguably is self employed in mowing lawns and doing chores), and includes wages. This child was paid for work. Sounds like a wage to me. However, if the child excludes the money from her income, then it is not compensation. That is why you would need to be sure to follow all the IRS rules on tax reporting and determining if there is an exemption from withholding.

Now of course, this is only an argument.

I did say that you would not want to be a test case.
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Re: Opening a kid's Roth IRA
Old 06-04-2005, 07:44 PM   #39
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Re: Opening a kid's Roth IRA

Quote:
Originally Posted by KB
My oldest son earned money from babysitting and mowing lawns, splitting wood and other odd jobs for other people. And that money was used to open his Roth IRA. Not from any work he did for me. So where does that fit in relation to this thread?
The Roth sounds ok to me in this case--see my prior post. Not thinking about what type of tax returns he has to file though.
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Re: Opening a kid's Roth IRA
Old 06-04-2005, 08:27 PM   #40
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Re: Opening a kid's Roth IRA

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It includes earnings from self employment (the child arguably is self employed in mowing lawns and doing chores), and includes wages...I did say that you would not want to be a test case.
You are contradicting your own arguement.* If you say the child is self-employed, then how is he supposed to get a W-2 from his parents?

But you are correct that nobody would want to be a test case since they would lose this case.* And that loss would amount to 6% per year as long as that money sits in he Roth IRA.* Good luck to all you non-business owners that may be doing this.* It only works until you get caught.
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