TIRA or Roth for 15 year old son? Need to decide today, 12/30.

[Aiming_4_55]

Last minute thought for 2022 - IRA or Roth for my son, age 15. Should I open a IRA and then back door it into a Roth?

Well, I didn't think he was going to make and save enough $$ in his first part time job, but he did. He earned about $7k this year and has $4k left. Spent $3k, part on a gaming laptop that we would not buy for him.

If he puts $3k into a Vanguard retirement account that I open today, I said I would match it. He is open to the idea of not touching it for many years.

Family tax impact, MFJ in a high tax bracket. He is a claimed as dependent. Because of this, should I open a IRA and then back door it into a Roth? TIA

 

[Winemaker]

I did the same for 16yo daughter years ago, she's 43 now. We didn't do a back door.

 

[Gumby]

You could do a tIRA now and have him convert once he goes out on his own and is in a very low bracket initially.

 

[Aiming_4_55]

You could do a tIRA now and have him convert once he goes out on his own and is in a very low bracket initially.

Would you think there's a tax impact if I went straight for a Roth for him?

 

[MarieIG]

I would Roth.

Think what it would be worth when he's 60.

 

[Aiming_4_55]

I would Roth.

Think what it would be worth when he's 60.

Ultimately, I want it in a Roth, but since I'm in a high tax bracket, would it make sense to go Traditional IRA for tax deduction since his income will be reported on ours (parent's tax return as a dependent), MFJ.

 

[Gumby]

Once he is no longer your dependent, he could very possibly have a zero percent marginal tax rate if his income is less than the standard deduction. I started filing taxes on my own when I was 18, and I definitely made less than the standard deduction.

 

[MarieIG]

Ultimately, I want it in a Roth, but since I'm in a high tax bracket, would it make sense to go Traditional IRA for tax deduction since h's income will be reported on MFJ.

I here that, and understand. One of the issues is that you will need to remember and be able to prevail upon son to convert when he is no longer a dependent. I did start off all my kiddos (yes, we're in a high tax bracket) with Roths; and have pounded into them the benefits of tax free growth. (It "took" in 5/6 kiddos).

I have a few friends whose sons tumbled right out of college into exceedingly well paying jobs. Said kids were exposed to, and shocked by, the taxes coming out of their checks.

 

[cathy63]

Does he also have unearned income?

If the only income he has is the $7K he earned, then he doesn't even need to file a return and you don't have to include his income on your return. He would want to file if he had tax withheld and needs to get it back.

Given that, I'd say to put $6K in the Roth IRA since you're willing to match his savings.

 

[Aiming_4_55]

Does he also have unearned income?

If the only income he has is the $7K he earned, then he doesn't even need to file a return and you don't have to include his income on your return. He would want to file if he had tax withheld and needs to get it back.

Given that, I'd say to put $6K in the Roth IRA since you're willing to match his savings.

Yes, $7k is only income and had taxes withheld, so we will be filing a tax return for him. Sounds like his income will not be included in parent's income on the tax return, so Roth is safe and won't increase taxes. Thanks

 

[Aiming_4_55]

I here that, and understand. One of the issues is that you will need to remember and be able to prevail upon son to convert when he is no longer a dependent. I did start off all my kiddos (yes, we're in a high tax bracket) with Roths; and have pounded into them the benefits of tax free growth. (It "took" in 5/6 kiddos).

I have a few friends whose sons tumbled right out of college into exceedingly well paying jobs. Said kids were exposed to, and shocked by, the taxes coming out of their checks.

Thanks. I just got off the phone w/ Vanguard and started the process of opening both, Traditional and Roth. I can fund either before April tax deadline. For some odd reason, I though Roth contribution had to be by the end of calendar year, but that has changed or I was under wrong info.

 

[38Chevy454]

I concur with doing the Roth. His tax rate is zero now. Nice to match his funds, and get him started. Show him the compounding effect. Let's assume 7% annual growth and 40 years to make it simple:
Total = Principle x (1+interest rate)^number of years = $6000 x (1+.07)^40 = $89846.75

That's without adding anything additional. Just letting the money sit and compound.

 

[Aiming_4_55]

I concur with doing the Roth. His tax rate is zero now. Nice to match his funds, and get him started. Show him the compounding effect. Let's assume 7% annual growth and 40 years to make it simple:
Total = Principle (1+interest rate) ^number of years = $6000 (1+.07) ^40 = $89846.75

That's without adding anything additional. Just letting the money sit and compound.

Absolutely, my hope and dream is to convince my kids to fund Roth from ages 15 to 22. Say we are successful in fulling the Roth for 8 years, for a total of $48k. At age 22, hopeful and silly planning is they would be gainfully employed and contributing to an employer 401k. By age 50, they will have options like me. but I'm doing OMY after FI until I feel it's no longer fun.

 

[isisdave]

We started a Roth for ours when he was old enough to push a broom. His income was never enough to be taxable. We added a little after he started working for others, but he was really shocked to discover $30k put away when he turned 30 and wanted to buy a house.

Oh, also, the Roth starts the 5-year clock ticking plenty early!

If your child is working in your business, you don't have to report wages for SS until age 18 either. In some states, worker's comp and unemployment insurance are not necessary.

 

[Sunset]

...., I thought Roth contribution had to be by the end of calendar year, but that has changed or I was under wrong info.

Maybe you were thinking of Roth Conversions.

 

[sengsational]

How does having a Roth account affect college financial aid? My kids had no earned income, so retirement accounts weren't on the agenda. The parents' retirement accounts, although reported, don't go directly into the formulas. 25% of the kid's assets are expected to be spent, but not sure if that includes retirement assets.

 

[Aiming_4_55]

How does having a Roth account affect college financial aid? My kids had no earned income, so retirement accounts weren't on the agenda. The parents' retirement accounts, although reported, don't go directly into the formulas. 25% of the kid's assets are expected to be spent, but not sure if that includes retirement assets.

From what I understand, student's and parent's Roth and TIRA won't count as an asset on an eventual FAFSA application, but if a withdrawal is made, then withdraw amount should be considered for the FAFSA calculations. See this article: https://money.com/roth-ira-teen-college-savings-fafsa/

529 account will probably impact FAFSA. I will be employed so my w-2 income will be too high for any "need-based" amount(s). We're focusing on merit based aid and/or funding out of pocket for my older kid. Part of my consideration for OMY, but still in my early 50's so just trying to enjoy the journey as I target 55 for ER.

 

[cathy63]

From what I understand, student's and parent's Roth and TIRA won't count as an asset on an eventual FAFSA application, but if a withdrawal is made, then withdraw amount should be considered for the FAFSA calculations. See this article: https://money.com/roth-ira-teen-college-savings-fafsa/

529 account will probably impact FAFSA. I will be employed so my w-2 income will be too high for any "need-based" amount(s). We're focusing on merit based aid and/or funding out of pocket for my older kid. Part of my consideration for OMY, but still in my early 50's so just trying to enjoy the journey as I target 55 for ER.

This part of your linked article is not quite accurate:

After a five-year waiting period, a student could take the principal — the money your family deposited — back out of the Roth without penalty.

The student can withdraw the principal from a Roth IRA at any time with no taxes or penalties. There's no five-year waiting period.

The student can also withdraw the earnings and use them for qualified education expenses with no taxes or penalties. See IRS Pub 970 Chapter 8 for additional info on that.

In both cases, the withdrawal does count as income on the following year's FAFSA.