Real Estate Investors - paying my young kids, so they can fund a Roth

[Aiming_4_55]

The other thread noted a few paths to FIRE via Real Estate. So, I've been thinking what to do with my rental income. I have a fair amount of stocks in taxable and retirement funds, so rather look at other things.

When I go to visit my properties for a "monthly inspection", if I had my kids accompany me and make it their responsibility to clean the walkway and/or yard. There seems to always be paper, mail, cans somewhere.

Can I pay them $50 or $100 or $500 a month? Then with the income, they fund a Roth account.

Disclaimer: My kids are 8 and 10.

Any suggestions or comments? I don't want to trigger an audit, but I could be open to be more aggressive with my expenses.

While some may say, this is gaming the system, I'm just trying to be generous to my kids' future.

 

[RunningBum]

You have to pay a market wage. In southern California you can probably justify more than minimum wage, but I don't think you can get away with $500 for 3 hours of work. nolo is a pretty reliable source, and has this to say: Why It's Tax Smart to Hire Your Children | Nolo.com

Rule 2: Compensation Must Be Reasonable

When you hire your children, it is advantageous (tax-wise) to pay them as much as possible. That way, you can shift as much of your income as possible to your children, who are probably in a much lower income tax bracket. However, you can’t just pay any amount you choose: Your child’s total compensation must be reasonable. Total compensation means the sum of the salary plus all the fringe benefits you provide your spouse, including health insurance and medical expense reimbursements, if any. This is determined by comparing the amount paid with the value of the services performed. You should have no problem as long as you pay no more than what you’d pay a stranger for the same work—don’t try paying your child $100 per hour for office cleaning just to get a big tax deduction. Find out what workers performing similar services in your area are being paid. For example, if you plan to hire your teenager to help answer the phone, call an employment agency or temp agency in your area to see what these workers are being paid.
To prove how much you paid (and that you actually paid it), you should pay your child by check, not cash. Do this once or twice a month as you would for any other employee. The funds should be deposited in a bank account in your child’s or spouse’s name. Your child’s bank account may be a ROTH IRA, Section 529 college savings plan, or custodial account that you control until your child turns 21.

 

[RunningBum]

Regarding age, they say "The IRS won’t believe that an extremely young child is a legitimate employee. How young is too young? The IRS has accepted that a seven-year-old child may be an employee but probably won’t believe that children younger than seven are performing any useful work for your business." so your 8 and 10 year olds are probably ok.

 

[Blue Collar Guy]

Can I pay them $50 or $100 or $500 a month? Then with the income, they fund a Roth account.

Disclaimer: My kids are 8 and 10.

"My kids are 8 and 10." I hope you can, you made me roar with laughter when I read their ages.

 

[Alan]

Have a read through this article on children funding IRAs and Roths

The Benefits of Starting an IRA for Your Child | Investopedia

If you claim your child as a dependent, he may be required to file an income tax return of his own if his income exceeds a certain amount set by the IRS ($6,300 for 2017). If your child earns less than this amount, she is likely in a 0% income tax bracket and she probably won’t benefit from the up-front tax deduction associated with traditional IRAs.

 

[RunningBum]

Have a read through this article on children funding IRAs and Roths

The Benefits of Starting an IRA for Your Child | Investopedia

The next paragraph has a more pertinent quote, especially since the OP was talking about opening a Roth for them, not a traditional IRA.

Because many kids don’t earn enough money to benefit from the up-front tax deduction associated with traditional IRAs, it makes sense in most cases to focus on Roth IRAs. In general, the Roth IRA is the IRA of choice for minors who have limited income and who, therefore, would not benefit from a deductible traditional IRA.

 

[Blue Collar Guy]

Have a read through this article on children funding IRAs and Roths

The Benefits of Starting an IRA for Your Child | Investopedia

Wow, Im going to give/pay my Grandkids, 500 a month and open an Roth IRA. thats under the 6300 limit, nobody owes taxes. and based on the example they will have 11 times the original investment after 50 years. I just need to get grandkids first.

 

[Alan]

The next paragraph has a more pertinent quote, especially since the OP was talking about opening a Roth for them, not a traditional IRA.

The reason I quoted the paragraph I did was to underline the earnings limit to avoid the children having to file an income tax return and the complication of the parents claiming them as dependents on their own returns. That limit applies to a Roth as well as an IRA.

 

[Aiming_4_55]

Wow, Im going to give/pay my Grandkids, 500 a month and open an Roth IRA. thats under the 6300 limit, nobody owes taxes. and based on the example they will have 11 times the original investment after 50 years. I just need to get grandkids first.

That's kind of what is running in my mind.

If I pay each $400 - 500 a month, they can have $4800 - 6000, so no taxes, no tax return, then I put that money in a Roth for them.

As a dreamer, if I was able to do this for 5 years, and have $25k - $30k in an account before they are out of high school, it would really help them for the future.

Disclaimer: I don't plan to tell them about it until I'm ready. Hint hint... my death bed, so hopefully it can double a few times. As an emergency, the funds could be available for withdraw in 5 years.

 

[Blue Collar Guy]

That's kind of what is running in my mind.

If I pay each $400 - 500 a month, they can have $4800 - 6000, so no taxes, no tax return, then I put that money in a Roth for them.

As a dreamer, if I was able to do this for 5 years, and have $25k - $30k in an account before they are out of high school, it would really help them for the future.

Disclaimer: I don't plan to tell them about it until I'm ready. Hint hint... my death bed, so hopefully it can double a few times. As an emergency, the funds could be available for withdraw in 5 years.

Sir, I love , love, love this idea. I wrote this down. Its on my to do list the minute I can.

 

[Aiming_4_55]

Why It's Tax Smart to Hire Your Children | Nolo.com

Thanks.

 

[Aiming_4_55]

The reason I quoted the paragraph I did was to underline the earnings limit to avoid the children having to file an income tax return and the complication of the parents claiming them as dependents on their own returns. That limit applies to a Roth as well as an IRA.

Thanks Alan.

Note to self: to keep it simple, I'll target $5500 annually ... ROTH max and under the requirement for tax implications/tax returns.

 

[Blue Collar Guy]

Thanks Alan.

Note to self: to keep it simple, I'll target $5500 annually ... ROTH max and under the requirement for tax implications/tax returns.

$450/month it is. Ill keep up with the limits. Lets see from birth to say 5 Ill pay them to pose for photos that I will try to sell. From 5-13 Ill pay them to comb my few strands of hair. From 14 on they get working papers.

 

[Aiming_4_55]

$450/month it is. Ill keep up with the limits. Lets see from birth to say 5 Ill pay them to pose for photos that I will try to sell. From 5-13 Ill pay them to comb my few strands of hair. From 14 on they get working papers.

Blue Collar Guy - nice, but now you increased your spending and no longer at 137%, so the extra 5 years wasn't wasted. Now, update your footer

I'm 48, FI, and enjoying what I do, so I'll continue the career/job until I've had enough, meanwhile I'll continue investing in stocks and real estate to grow the stash. It will open more doors to providing even more options for me, my spouse, and my kids. It may be silly for some, but I want to be in a position to help with college, car, wedding, residence, etc. if they "deserve it". It won't be pure spoiling, but blessing them with opportunities in some ways that was never available to me.

 

[RE2Boys]

Note that the NOLO website also lists that you must give your child a W2 (which means giving the IRS a copy) as part of showing that your child is a legitimate employee. While you may not be required to withhold SS taxes, you may be subject to state and local tax witholding laws for your employee (child).

Or you could treat them as independent contractors (maybe be a stretch). But then you would need to issue a 1099MISC if over $600 paid in a given year. A tax return is required of any individual, regardless of age, who has self-employment income over $400.

So you don't escape the paperwork in showing that your child has earned income and thus is eligible to contribute to a Roth IRA.

When my boys were 13 they started earning money refereeing youth soccer. Even without a 1099MISC, they were required to file tax returns as required by law.

 

[Blue Collar Guy]

Blue Collar Guy - nice, but now you increased your spending and no longer at 137%, so the extra 5 years wasn't wasted. Now, update your footer

I'm 48, FI, and enjoying what I do, so I'll continue the career/job until I've had enough, meanwhile I'll continue investing in stocks and real estate to grow the stash. It will open more doors to providing even more options for me, my spouse, and my kids. It may be silly for some, but I want to be in a position to help with college, car, wedding, residence, etc. if they "deserve it". It won't be pure spoiling, but blessing them with opportunities in some ways that was never available to me.

+1 I will, as soon as I get the Grand children. Yes you are correct, thank you for making me feel better maybe the 5 years wasnt wasted after all.

 

[cathy63]

Disclaimer: I don't plan to tell them about it until I'm ready. Hint hint... my death bed, so hopefully it can double a few times. As an emergency, the funds could be available for withdraw in 5 years.

Hopefully you'll tell them when they're 18 and legally responsible for the accounts that have their names on them, even if you're not on your death bed. At some point, they may need to know whether they've had Roth IRAs for at least 5 years, or they may need to fill out a FAFSA or other paperwork and list all their assets.

Also, for anyone thinking of putting money in a grandchild's name, please make sure to tell that child's parents. We dealt with a rather sticky tax situation that would have been entirely avoided if we had only known what the grandparents were doing!

 

[Blue Collar Guy]

Note that the NOLO website also lists that you must give your child a W2 (which means giving the IRS a copy) as part of showing that your child is a legitimate employee. While you may not be required to withhold SS taxes, you may be subject to state and local tax witholding laws for your employee (child).

Or you could treat them as independent contractors (maybe be a stretch). But then you would need to issue a 1099MISC if over $600 paid in a given year. A tax return is required of any individual, regardless of age, who has self-employment income over $400.

So you don't escape the paperwork in showing that your child has earned income and thus is eligible to contribute to a Roth IRA.

When my boys were 13 they started earning money refereeing youth soccer. Even without a 1099MISC, they were required to file tax returns as required by law.

Ill have my tax guy issue 1099's .I want it all legit.

 

[RE2Boys]

or they may need to fill out a FAFSA or other paperwork and list all their assets.

Also, for anyone thinking of putting money in a grandchild's name, please make sure to tell that child's parents. We dealt with a rather sticky tax situation that would have been entirely avoided if we had only known what the grandparents were doing!

So true, I've seen grandparents hold back on tax documents that should be reported on the now 16 or 24 year old "child" tax return because they didn't tell the child or the parents of an accounts exsistence. Not reporting income that the IRS knows about is asking for trouble.

BTW, retirement accounts are not to be reported on the FAFSA.

 

[cathy63]

BTW, retirement accounts are not to be reported on the FAFSA.

Cool. I didn't know that as our DD didn't have any IRAs when we did the FAFSA.

 

[RE2Boys]

Cool. I didn't know that as our DD didn't have any IRAs when we did the FAFSA.

Parent's retirement accounts are also not to be reported on FAFSA

 

[GrayHare]

To be IRA compatible of course it must be earned income, but why would Social Security tax not be due on earned income?

 

[RE2Boys]

To be IRA compatible of course it must be earned income, but why would Social Security tax not be due on earned income?

https://www.irs.gov/businesses/small-businesses-self-employed/family-help

Child employed by parents
Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Refer to the "Covered services of a child" section below. Payments for the services of a child under age 21 who works for his or her parent in a trade or business are not subject to Federal Unemployment Tax Act (FUTA) tax. Payment for the services of a child are subject to income tax withholding, regardless of age.

 

[Blue Collar Guy]

https://www.irs.gov/businesses/small-businesses-self-employed/family-help

Child employed by parents
Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Refer to the "Covered services of a child" section below. Payments for the services of a child under age 21 who works for his or her parent in a trade or business are not subject to Federal Unemployment Tax Act (FUTA) tax. Payment for the services of a child are subject to income tax withholding, regardless of age.

OK change of plans, Things are getting complicated now. Im going to ask my son to pay my grandchild for his photo rights, then have him pay my grandchild to comb my hair. Ill gift the money back to my son. This whole sole proprietorship thing is a big question mark.

 

[bingybear]

might want to check if you or your kids need to pay worker compensation taxes depending how you set this up.