Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Re: Opening a kid's Roth IRA
Old 06-04-2005, 08:33 PM   #41
Thinks s/he gets paid by the post
 
Join Date: Dec 2002
Posts: 3,875
Re: Opening a kid's Roth IRA

Quote:
Originally Posted by retire@40
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.
I kind of agree, but you are a little argumentative. I am sure
Martha knows the difference. She just stated it poorly. Happens to all of us.

JG
__________________

__________________
MRGALT2U is offline   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!

Re: Opening a kid's Roth IRA
Old 06-04-2005, 08:42 PM   #42
Thinks s/he gets paid by the post
retire@40's Avatar
 
Join Date: Feb 2004
Posts: 2,670
Re: Opening a kid's Roth IRA

Quote:
Originally Posted by th
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?
Frankly, I am perplexed why there would not be a ruling regarding wages paid for family chores. *However, since the IRS has ruled against taxpayers based on the "smell test" even though there may not have been a reg or ruling in those cases, this scenario falls within those same "smell test" parameters. *Remember, the IRS looks at substance over form. *Just because you may prepare a W-2 for your kid, it doesn't necessarily mean it's a valid W-2 form.

Unless someone can point to a case that shows a taxpayer beating the IRS on this issue, I would not recommend you try this at home.
__________________

__________________
No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
retire@40 is offline   Reply With Quote
Re: Opening a kid's Roth IRA
Old 06-04-2005, 08:44 PM   #43
Thinks s/he gets paid by the post
retire@40's Avatar
 
Join Date: Feb 2004
Posts: 2,670
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?*
Perfectly fine.* He was an independent contractor with earned income and can contribute to a Roth IRA if he's not disqualified for some other reason.
__________________
No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
retire@40 is offline   Reply With Quote
Re: Opening a kid's Roth IRA
Old 06-04-2005, 09:13 PM   #44
Thinks s/he gets paid by the post
retire@40's Avatar
 
Join Date: Feb 2004
Posts: 2,670
Re: Opening a kid's Roth IRA

Quote:
Originally Posted by MRGALT2U
I kind of agree, but you are a little argumentative.* I am sure
Martha knows the difference.* She just stated it poorly.* Happens to all of us.
But if you make a statement to the IRS like that, you just lost the case.*

Lawyers live and die by their words, just like politicians.* Look at what happened to Kerry when he said he voted against something after he voted for it.

I will shake hands with Martha when we are all done with this point counter-point, but until then, I have my gloves up and boxing.
__________________
No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
retire@40 is offline   Reply With Quote
Re: Opening a kid's Roth IRA
Old 06-04-2005, 09:48 PM   #45
Thinks s/he gets paid by the post
 
Join Date: Jun 2004
Location: No. California
Posts: 1,601
Re: Opening a kid's Roth IRA

Thanks all. Whew. that was tough......
__________________
KB is online now   Reply With Quote
Re: Opening a kid's Roth IRA
Old 06-04-2005, 09:50 PM   #46
Thinks s/he gets paid by the post
 
Join Date: Mar 2004
Posts: 1,318
Re: Opening a kid's Roth IRA

Kiplingers sides with Retire@40 in their recent article on the subject -- chores don't cut it. If you don't have a business, put the kid to work for other people -- it's even cheaper for you!

And since they are forking all their money over to this Roth thingy, then give them a nice big allowance.

Kiplingers talks about a matching funds agreement where the kid just earns the 4k+ per year, spends it or saves it in the Roth in some proportion as you agree, and you just make up the balance with a gift/check into the Roth. Where the actual Roth check comes form doesn't matter, just that the kid had earned income in sufficient quantity.

One more reason to have a profitable little self-employment gig on the side. Then having your kid maintain your home/home business' wireless network, keep the computers free of spyware, upgrade operating system and so forth, and keep the company's website up to snuff are all good training and valid stuff you'd need to pay for anyway. And improve their odds of finding work in the community next year. (At least that's my plan).
__________________
ER for 10 years; living off 4.3% of savings (and a few book royalties ;-)
ESRBob is offline   Reply With Quote
Re: Opening a kid's Roth IRA
Old 06-04-2005, 10:02 PM   #47
Moderator Emeritus
Martha's Avatar
 
Join Date: Feb 2004
Location: minnesota
Posts: 13,212
Re: Opening a kid's Roth IRA

ERS Bob, I agree, I wouldn't do it another way. I didn't suggest the idea that paid for chores constitute employment, someone else did. I said the area is gray because there is no ruling on the issue. I did try to throw out some arguments in favor of treating compensation for chores as compensation supporting an IRA. But I really do think it would be a long shot. And Retire@40 is right that just because there is no ruling doesn't mean you will get out of penalties and interest when the IRS doesn't buy your argument.
__________________
.


No more lawyer stuff, no more political stuff, so no more CYA

Martha is offline   Reply With Quote
Re: Opening a kid's Roth IRA
Old 06-04-2005, 10:30 PM   #48
Moderator Emeritus
Martha's Avatar
 
Join Date: Feb 2004
Location: minnesota
Posts: 13,212
Re: Opening a kid's Roth IRA

Quote:
Originally Posted by retire@40
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.
I did not contradict my own argument. I gave some of the definitions of compensation from the applicable IRS pub. You can be paid a wage. You can be self employed. Etc. KBs kid is clearly self employed. Of course different tax forms are required depending on whether you are an employee or self employed. Part of the problem with going through analysis of issues on a message board such as this is that you cannot write a comprehensive memorandum of all issues in one post. The particular issue discussed at that point was "what is the meaning of compensation in the context of an IRA", not what tax forms need to be filed, which depends on how you characterize that compensation. I simply emphasized that for the argument to work, you better file the appropriate tax forms. Of course, determining if the child is exempt from withholding is only relevant if you consider the pay a wage.

But if I was not clear enough in my prior posts, I would not recommend treating paid for chores at home as compensation to support a Roth IRA. However, I don't buy your argument about business purposes. To me, that argument is only important in the context of deductions. [edit: for example, you have to pay the nanny taxes even though you don't have a business, you just can't deduct what you pay in income taxes] However, I agree with you that the family likely would lose before the IRS. The basic problem is that people don't in fact treat payment for chores as earned income. And if it is not treated by you as income, it doesn't meet the definition of compensation I linked to earlier in this thread.

Just before I posted this message, I did a little googling on the issue. I generally avoid that for tax issues and stick to what the IRS says and courts say. For sure I don't recommend taking advise over the internet on these kind of issues. (mine, retire@40's or anyone elses) However, there actually were a few websites that talked about the issue. The two I looked at said it was a gray area. None of the sites I saw went into it as deeply as we have here today. Ain't we great.

arrrr.

__________________
.


No more lawyer stuff, no more political stuff, so no more CYA

Martha is offline   Reply With Quote
Re: Opening a kid's Roth IRA
Old 06-05-2005, 12:30 PM   #49
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Opening a kid's Roth IRA

Quote:
Originally Posted by retire@40
Frankly, I am perplexed why there would not be a ruling regarding wages paid for family chores. However, since the IRS has ruled against taxpayers based on the "smell test" even though there may not have been a reg or ruling in those cases, this scenario falls within those same "smell test" parameters. Remember, the IRS looks at substance over form. Just because you may prepare a W-2 for your kid, it doesn't necessarily mean it's a valid W-2 form.

Unless someone can point to a case that shows a taxpayer beating the IRS on this issue, I would not recommend you try this at home.
Ok, I got it. Opinion stated as fact. Thanks.

So lets look at this in a prarie dog fashion. You open the roth, the kid funds it with money you give them for doing stuff in the faux 'family business' or for chores or through schedule 29c subsection d paragraph 12...whatever. No tax return is filed because income is below the threshold as already discussed. Life goes on...

What exactly would trigger an audit or other activity where the IRS would even get engaged to decide what you did was wrong? Does the investment company send any kind of paperwork to the IRS stating that a roth was created/funded?
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Opening a kid's Roth IRA
Old 06-05-2005, 01:43 PM   #50
Thinks s/he gets paid by the post
retire@40's Avatar
 
Join Date: Feb 2004
Posts: 2,670
Re: Opening a kid's Roth IRA

Quote:
Originally Posted by th
Ok, I got it.* Opinion stated as fact.* Thanks.

What exactly would trigger an audit or other activity where the IRS would even get engaged to decide what you did was wrong?* Does the investment company send any kind of paperwork to the IRS stating that a roth was created/funded?
First, if you think it's not a fact that the IRS uses the "smell test" to scrutinize financial transactions, I can tell you haven't been involved in many IRS issues.* Good for you for staying out of trouble.

Paperwork = Form 5498 sent to IRS and IRA owner.
__________________
No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
retire@40 is offline   Reply With Quote
Re: Opening a kid's Roth IRA
Old 06-05-2005, 02:21 PM   #51
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Opening a kid's Roth IRA

You're still expressing an opinion. I dont mean to be argumentative (ok, I do) but I like to make sure I know when someones giving me facts or what they think will happen. Its pretty cool when they know the difference too.

I've actually had plenty of experience with the IRS. Its pretty hard to do your own taxes on over a million a year in income with stock options, bonuses, real estate transactions and a stack of investment buy/sell sheets that comes up to your knees and not run into any gray areas. So far everything they've questioned or wanted more info on was satisfied with no additional tax or penalties. And I'm not writing this from the penitentiary

I'm unaware of any official or unofficial 'smell test'. If there is tax law on the matter then there is a guideline. If the tax law is vague, they may make a judgement one way or another, which may be overturned on appeals. If there is no law, then some has to be made before I can be pressed to do anything different, pay any monies, or get in any kind of trouble.

But if theres a 'smell test', paying my kid to do work I might pay someone else to do instead, and letting them invest that payment in a retirement account smells pretty darn ok to me. That there is no specific tax law or precedent saying that paying your kid isnt income says that the IRS doesnt feel the need to have such a law because it'd probably get tossed out the first time it was challenged.

It'd also have to be a pretty slow day at the IRS to have them take the 5498 form, see that there is no matching return, see that its a 15 year old kid, and feel like its a good day to write a letter and find out whats going on.

But I'd keep a quick log of what work was done and how much I paid for the work, to show it wasnt simple chores like cleaning their room, or a simple allowance.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Opening a kid's Roth IRA
Old 06-05-2005, 03:37 PM   #52
Moderator Emeritus
laurence's Avatar
 
Join Date: Feb 2005
Location: San Diego
Posts: 5,234
Re: Opening a kid's Roth IRA

My Dad's a recently retired IRS auditor, I'll ask him tonight at dinner about this.
__________________
laurence is offline   Reply With Quote
Re: Opening a kid's Roth IRA
Old 06-05-2005, 09:47 PM   #53
Thinks s/he gets paid by the post
retire@40's Avatar
 
Join Date: Feb 2004
Posts: 2,670
Re: Opening a kid's Roth IRA

Quote:
Originally Posted by th
What exactly would trigger an audit or other activity where the IRS would even get engaged to decide what you did was wrong?
Oops, I missed that question with my last response.* Trigger?* How about the parent or the kid bragging to a jealous friend, neighbor, or relative about that scheme.* There could be a nice reward by the IRS for information like that.*

Let's see...a contribution of $4K a year plus interest for 10 years with an excise tax penalty of 6% per year...
__________________
No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
retire@40 is offline   Reply With Quote
Re: Opening a kid's Roth IRA
Old 06-06-2005, 06:57 AM   #54
Thinks s/he gets paid by the post
 
Join Date: Dec 2002
Posts: 3,875
Re: Opening a kid's Roth IRA

Quote:
Originally Posted by retire@40
Oops, I missed that question with my last response.* Trigger?* How about the parent or the kid bragging to a jealous friend, neighbor, or relative about that scheme.* There could be a nice reward by the IRS for information like that.*

Let's see...a contribution of $4K a year plus interest for 10 years with an excise tax penalty of 6% per year...
There are a bunch of ways to achieve your goal without doing anything illegal. And, even if you did cross some indistinct line, I doubt the IRS
has the manpower or inclination to knock on your door. Disclaimer:
This should not be construed to suggest bending any rules. Certainly the IRS
is one agency you want to stay on good terms with.

JG
__________________
MRGALT2U is offline   Reply With Quote
Re: Opening a kid's Roth IRA
Old 06-06-2005, 08:31 AM   #55
Moderator Emeritus
Martha's Avatar
 
Join Date: Feb 2004
Location: minnesota
Posts: 13,212
Re: Opening a kid's Roth IRA

Well, I was going to quit poking at this thread, but. . . It often is very hard to know where lines might be drawn on tax issues. Say your teenage daughter mows the neighbor's lawn, gets paid. Mows grandpa's lawn. Gets paid. Runs some errands for grandpa and gets paid. Mows moms and dads lawn and gets paid. Isn't it at least arguable that all this work could support an IRA contribution?

BTW, I did get the highest grade in my law school class in tax law. Of course, it was pre 1986 so basically irrelevant.

I still enjoy reading Bitker and Eustice (or as students say, Bitter and Useless) on tax law.

__________________
.


No more lawyer stuff, no more political stuff, so no more CYA

Martha is offline   Reply With Quote
Re: Opening a kid's Roth IRA
Old 06-06-2005, 10:05 AM   #56
Moderator Emeritus
laurence's Avatar
 
Join Date: Feb 2005
Location: San Diego
Posts: 5,234
Re: Opening a kid's Roth IRA

My Dad says people employ their kids all the time, the job has to be something you would otherwise hire someone else to do - but he admits the IRS has a hard time proving that one way or the other. He says if you keep good records, pay stubs etc. and go through the motions of a professional employer/employee relationship, you won't have problems. The red flags would go up when people would say, "well, I uh, would just pay him out of the drawer, er, I think it was that much, job description? eh, er."

But even if they really felt you were scamming, in a case like this they most often come back and with an offer of a civil penalty, late fees etc., you write the check, and you mind your p's and q's for a few years, and you fall off the red flag list.

He did mention that this type of "anomoly" does usually lead to a check of all adult family members to see if there is a pattern in their tax returns. His example was "gee, the guy we slapped down has resonable numbers this year, but all his brothers and sisters have ten thousand dollar losses in their Amway businesses again!"

This activity is not sufficient to trigger an audit on it's own, in his opinion. But hey, he's just one auditor!
__________________
laurence is offline   Reply With Quote
Re: Opening a kid's Roth IRA
Old 06-06-2005, 10:16 AM   #57
Thinks s/he gets paid by the post
retire@40's Avatar
 
Join Date: Feb 2004
Posts: 2,670
Re: Opening a kid's Roth IRA

Quote:
Originally Posted by Martha
Say your teenage daughter mows the neighbor's lawn, gets paid.* Mows grandpa's lawn.* Gets paid.* Runs some errands for grandpa and gets paid.* Mows moms and dads lawn and gets paid.* Isn't it at least arguable that all this work could support an IRA contribution?
This is diverting from the original issue of W-2 for chores and has totally different tax ramifications, but yes, because the child is self-employed in the business of mowing lawns.* The child may file a Schedule C and report all income and related expenses.* But the child will be subject to federal, state, and self-employment taxes.* Whatever is left over may be contributed to a Roth IRA up to $4K.
__________________
No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
retire@40 is offline   Reply With Quote
Re: Opening a kid's Roth IRA
Old 06-06-2005, 10:28 AM   #58
Thinks s/he gets paid by the post
retire@40's Avatar
 
Join Date: Feb 2004
Posts: 2,670
Re: Opening a kid's Roth IRA

Quote:
Originally Posted by Laurence
My Dad says people employ their kids all the time
People employ their kids all the time through their business (not through their household for chores).* That's the key distinction.
__________________
No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
retire@40 is offline   Reply With Quote
Re: Opening a kid's Roth IRA
Old 06-06-2005, 10:28 AM   #59
Moderator Emeritus
Martha's Avatar
 
Join Date: Feb 2004
Location: minnesota
Posts: 13,212
Re: Opening a kid's Roth IRA

Quote:
Originally Posted by Laurence
My Dad says people employ their kids all the time, the job has to be something you would otherwise hire someone else to do - but he admits the IRS has a hard time proving that one way or the other. He says if you keep good records, pay stubs etc. and go through the motions of a professional employer/employee relationship, you won't have problems. . . .
Interesting to have his point of view. Fits with my first "argument" that chores like mowing the lawn, which you might pay someone to do, might be ok, but chores like making your bed wouldn't be fine.

Still better do my cya and say that I wouldn't advise basing an IRA contribution on home chores. I probably would be ok with my prior example of the self employed child who does the same type of work for you as well as third parties



__________________
.


No more lawyer stuff, no more political stuff, so no more CYA

Martha is offline   Reply With Quote
Re: Opening a kid's Roth IRA
Old 06-06-2005, 10:32 AM   #60
Moderator Emeritus
Martha's Avatar
 
Join Date: Feb 2004
Location: minnesota
Posts: 13,212
Re: Opening a kid's Roth IRA

Quote:
Originally Posted by retire@40
People employ their kids all the time through their business (not through their household for chores). That's the key distinction.
I still disagree that this is the key distinction. The relevant question is whether the child is earning compensation as defined by the IRS.

As I stated earlier, people pay compensation to others without having a business. The example I gave was paying the nanny and being liable for the nanny tax. No business involved. This only means you can't deduct business expenses. It has nothing to do with whether the child or the nanny gets compensation as defined by the IRS.
__________________

__________________
.


No more lawyer stuff, no more political stuff, so no more CYA

Martha is offline   Reply With Quote
Reply

Tags
ira


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
Traditional IRA to Roth Conversion Question Dog FIRE and Money 5 03-10-2007 10:53 PM
Roth IRA for kids semtex FIRE and Money 11 03-07-2007 12:37 AM
Roth IRA & Timber Rights/Tree Farm terminator FIRE and Money 6 07-16-2006 04:09 PM
Roth IRA for young adults Sam FIRE and Money 19 06-02-2006 11:14 PM
Not eligible for Roth IRA - conversion? Lusitan FIRE and Money 9 02-23-2006 11:00 AM

 

 
All times are GMT -6. The time now is 03:26 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.