Custodial Roth IRA for minor children W-2 and non W-2 earnings contribution question

[Love This Community]

Hello. I opened a custodial Roth IRA for my children. My daughter (minor) is working this summer and will earn about $1,500 - $2,000 this summer on W-2.

1) Can she contribute the entire amount to her custodial Roth IRA account?

2) She earns about $1,000 by pet sitting and chores (non W-2 income). Can she contribute this amount to her custodial Roth IRA?

3) Does she need to send this amounts from her bank account to Vanguard (where she has custodial Roth account). If yes, I need to navigate that process since she doesn’t have check books or signing authorization from the bank.

I’d prefer that she save and invest this money for long term growth.

She is totally ok with investing her earned income. She gets money for all her needs and wants from us and we are totally happy with it.

Thank you,
LTC

 

[SevenUp]

1) Yes, she (or anyone) may contribute the amount...in box 1...of Form W-2 (see that link for details).
2) Yes, she (or anyone) may contribute the net earnings from [her] business (see that link for the definition of "net"). She will also be liable for self-employment taxes.

The amounts in 1) and 2) are additive, up to the IRS maximum contribution limit.

3) If you are the custodian of the custodial account then you should be able to link your checking account. How you deal with intra-family transfers is up to you.

 

[Humbooster]

Yes, everything SevenUp said. I did this for my kids too and it has worked out. The change from custodial to ownership was a bit messy but that was more than 10 years ago so hopefully Vanguard has got it down by now.

 

[Texas Proud]

Just a thought...



Have you thought about matching? My 19YO DD has been working for a few years... I try to get her to contribute her earnings, but she has to have something today as a reward for hard work..


SOOO, I with match 50% of whatever she is willing to contribute... this past year she maxed out her contribution which was a few thousand... I put in half and so did she... and she got to spend (or save as she is putting money aside) the rest of her income...

 

[Humbooster]

That is also a great idea, I also 'hinted" that it would be a good idea to donate any tax refund to the Roth as well.

 

[Love This Community]

Thanks for the detailed reply SevenUp. Very helpful.

Humbooster and Texas Proud, good points for me to consider. I can see going the route of “bank of dad” matching with my son but my daughter is a saver and doesn’t want to spend on anything other than her college applications.

 

[Texas Proud]

Thanks for the detailed reply SevenUp. Very helpful.

Humbooster and Texas Proud, good points for me to consider. I can see going the route of “bank of dad” matching with my son but my daughter is a saver and doesn’t want to spend on anything other than her college applications.

Yea but... there is no reason to put all of her money in a retirement account at this age....


My DD is putting her money in Fidelity so she can pay for graduate college... if it were in a retirement account she would probably need to borrow...

 

[Love This Community]

Good point. With Roth, wouldn’t she have the flexibility to withdraw principle amount after 5 years if needed?

 

[SevenUp]

Good point. With Roth, wouldn’t she have the flexibility to withdraw principle amount after 5 years if needed?

Roth contributions may be withdrawn at any time without tax or penalty.

 

[Texas Proud]

Good point. With Roth, wouldn’t she have the flexibility to withdraw principle amount after 5 years if needed?

Yes, but it is a bad practice to have them take money out of a retirement account.. better to teach them to have balance and save outside of a retirement account... well, IMO at least...

 

[Love This Community]

Point well taken Texas Proud. I didn’t look at it from that angle. Appreciate your reply

 

[Koolau]

1) Yes, she (or anyone) may contribute the amount...in box 1...of Form W-2 (see that link for details).
2) Yes, she (or anyone) may contribute the net earnings from [her] business (see that link for the definition of "net"). She will also be liable for self-employment taxes.

The amounts in 1) and 2) are additive, up to the IRS maximum contribution limit.

3) If you are the custodian of the custodial account then you should be able to link your checking account. How you deal with intra-family transfers is up to you.

IOW you can even pay into the Roth for her and let her save the cash for college (or a future spring break!)

 

[Koolau]

Yea but... there is no reason to put all of her money in a retirement account at this age....


My DD is putting her money in Fidelity so she can pay for graduate college... if it were in a retirement account she would probably need to borrow...

Yeah, this is all strategic kinds of thinking. There arguments for and against just about every decision when it comes for life-time financial planning.

My take: STUFF every dollar you can afford into a Roth NOW! It has so many advantages - especially since you'll be paying practically nothing in taxes at an early age. We started Roths for our kids and even funded them for many years. So, now our kids each have $100K or so head start.

 

[Texas Proud]

Yeah, this is all strategic kinds of thinking. There arguments for and against just about every decision when it comes for life-time financial planning.

My take: STUFF every dollar you can afford into a Roth NOW! It has so many advantages - especially since you'll be paying practically nothing in taxes at an early age. We started Roths for our kids and even funded them for many years. So, now our kids each have $100K or so head start.

I do not disagree at all.. which is why I paid 50% of the amount going into their accounts... which leaves them money to either spend or save in a regular account...



But I also do not want them to think of the ROTH as a short term savings account.. it is an investment for your retirement future... not can I spend something 3 or so years from now..


I also drilled into their heads that they need to save at a minimum 10% of their salary, preferably 15%.. not including the match if any... I do not know if DS is doing it but hope he is... DD still in college and not making much so we are close to 100% into ROTH...

 

[Koolau]

I do not disagree at all.. which is why I paid 50% of the amount going into their accounts... which leaves them money to either spend or save in a regular account...



But I also do not want them to think of the ROTH as a short term savings account.. it is an investment for your retirement future... not can I spend something 3 or so years from now..


That's the most important thing. That Roth needs to be "untouchable." It's for the distant future. Should, in many cases, be the LAST thing used by an retiree. I understand that sometimes it's important to use some "tax free" money from a Roth to avoid tax bracket creep and especially IRMAA. BUT otherwise, let it ride!