Roth IRA contribution for child/retiree

[BigBob]

I have read several places about having your kids earn money for work they do around the house (to give them the earned income needed to contribute to a Roth), and contributing this money (or other money) to their Roth IRA. Is this common practice (and legal)?

Take this one step further. Say I am retired(well, I can dream, can't I?), and want to "divert" some funds to a Roth IRA, but have no j*b, officially, so no earned income. Can I hire my wife for services(whatever that may be ) and contribute to her Roth IRA, and be hired by my wife (to mow the lawn, of course) and contribute to my Roth IRA?

I did some searching and could not find a good answer.

 

[Martha]

Oooh! Want some lively discussions?

http://www.early-retirement.org/forums/f30/opening-kids-roth-ira-16798.html
http://www.early-retirement.org/forums/f28/roth-ira-kids-26196.html

There are some more but the search function is bogus.

 

[Martha]

Found another thread: http://www.early-retirement.org/forums/f28/kids-iras-yet-again-18879.html

I know it is kind of boring to simply link to prior discussions, but really, I would say we have covered the kid IRA issue on this forum better than just about anywhere. As you will see, paying kids for chores is a gray area.

I would say paying your wife for chores does not pass the smell test that Retire@40 keeps referring to in one of the threads.

 

[BigBob]

Thanks, Martha, for the links. I knew it had been discussed and referred to elsewhere, but those links seem to cover it well. (I have yet to master the searching, but I think I am getting there. "Search" doesn't yet know that KIDS and CHILDREN are the same word )

I often read of retirees(that no longer w*rk) contributing to Roth IRAs, and I was wondering how they do it. I came up with only two possibilities:

1. The year that they retire, they contribute fully to the Roth IRA.
2. They talk about contributing to a Roth IRA, but are actually referring to converting a Traditional IRA to a Roth.

Does anyone have any other possibilities that do not include the dreaded w*rk?

 

[Martha]

I think you pretty much have it nailed. This year I had some compensation trickle in from work. I am dumping it all in my 401k. If that option wasn't available and we did't exceed the income limits, I would have done a Roth.

Publication 590 from the IRS talks about IRAs. To have an IRA of any type you (or your spouse) must have income from "compensation." Publication 590 (2006), Individual Retirement Arrangements (IRAs)

Compensation is defined as:

Generally, compensation is what you earn from working. For a summary of what compensation does and does not include, see Table 1-1. Compensation includes the items discussed next.
Wages, salaries, etc. Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.
Commissions. An amount you receive that is a percentage of profits or sales price is compensation.
Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:

• The deduction for contributions made on your behalf to retirement plans, and
• The deduction allowed for one-half of your self-employment taxes.

Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs. When you have both self-employment income and salaries and wages, your compensation includes both amounts.
Self-employment loss. If you have a net loss from self-employment, do not subtract the loss from your salaries or wages when figuring your total compensation.
Alimony and separate maintenance. For IRA purposes, compensation includes any taxable alimony and separate maintenance payments you receive under a decree of divorce or separate maintenance.
Nontaxable combat pay. If you were a member of the U.S. Armed Forces, compensation includes any nontaxable combat pay you received. This amount should be reported in box 12 of your 2006 Form W-2 with code Q.

So, unfortunately, someone is going to have to work. Or, get a divorce, get paid alimony, and contribute that to a Roth. Oh, but then you would have to pay taxes on the alimony, so I guess that doesn't work either.

 

[FinanceGeek]

To reference another prior discussion, the lack of IRS-approved "compensation" is exactly why I advocate funding a Vanguard VA for children/grandchildren (as babies!) to get their retirement started.

It turned out to be controversial when I suggested it, but I cannot see any other way to do it (I'll concede 529s, but they have less utility for retirement funding).

 

[packrat44]

Can I hire my wife for services(whatever that may be ) and contribute to her Roth IRA, and be hired by my wife (to mow the lawn, of course) and contribute to my Roth IRA?

I would say paying your wife for chores does not pass the smell test that Retire@40 keeps referring to in one of the threads.

I often read of retirees(that no longer w*rk) contributing to Roth IRAs, and I was wondering how they do it. I came up with only two possibilities:

1. The year that they retire, they contribute fully to the Roth IRA.
2. They talk about contributing to a Roth IRA, but are actually referring to converting a Traditional IRA to a Roth.

Does anyone have any other possibilities that do not include the dreaded w*rk?

How about the DW hiring the DH (or vice versa) as her FA with a fee paid equal to the contributions to be made to her ROTH and a spousal ROTH for him? SSN and Medicaid would probably have to be paid for the employee and the emploer. That would negate some of the benefit.

In my last (partial) year of employment, I contributed the max to my ROTH and TSP. Actually, that has been done in every year. My DW FIREd earlier this year after maxing her ROTH and the spousal ROTH and came close to max on her 403(b). We are now rolling her 403(b) into a TIRA (mine was rolled over last year) and then converting to ROTHs over the next several years.

The idea of being able to convert some from the taxable account to a ROTH is intriging, as long as costs are not too high (and legal).

 

[Nords]

How about the DW hiring the DH (or vice versa) as her FA with a fee paid equal to the contributions to be made to her ROTH and a spousal ROTH for him? SSN and Medicaid would probably have to be paid for the employee and the emploer. That would negate some of the benefit.

I'll say. The recipient would have to pay the full self-employment Social Security & Medicare taxes as well as the regular income taxes. Tax-free compounding can't recover from that bite out of the jugular. I think the IRS carefully checked those spouse-payroll numbers before the IRA legislation got through Congress.

One of the few advantages to kid IRAs is that the parental employer isn't obligated to pay FICA/Medicare taxes on family employees below the age of 18... and the kid pays little or no income tax on their parental wages. Since there's no need for a tax deduction, either, that's why the kid starts a Roth instead of a traditional IRA. Meanwhile our kid is paying full FICA/Medicare taxes on her Kumon part-time job, and the People's Republic of Hawaii takes a bigger income-tax bite than the federal govt.