To make IRA contributions, you need to have earned income.
Earned income can be anything that requires work, like babysitting, shoveling snow, raking leaves - that kids can easily do/plausibly have done. It is self employment income, and more than $400 must be reported and self employment taxes paid.
What’s the down side to contributing $375 per year to a Roth IRA for your child as soon as they reach the age to reasonably be able to do some sort of work (maybe 8 or 9?), until they are old enough to have outside employment?
Granted the world is going to be a different place 50 years from now, but in today’s terms that could result in a half-million dollar account by the time they reach [the current] retirement age. And that’s without saving another penny once they’re no longer a dependant.
You can go bigger than $375 per year, but then it needs to be claimed on the child’s tax return along with paying the 15% SE taxes. Which could still be well worth it.
Yes, if you have a business that can employ your kids, it opens up tons of other possibilities as well. So here I’m focusing on just situations without a business to leverage.
I thought your kid gets a personal standard deduction for earned income (kiddie tax only for unearned income), so more than that (~$15k) might incur income taxes for the child. I hadn’t thought about the SE tax, but you probably do need to include that.
This is a few years old, but shows that SE tax is not due, from either the kid or the parents business, if they can be hired by the parents business.
If the business is unincorporated and the wages are paid to a child under age 18, he or she will not be subject to FICA – Social Security and Hospital Insurance (HI, aka Medicare) – taxes since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed in an unincorporated business owned by the parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the business won’t have to pay its half of these payroll taxes either. In addition, by paying the child and thus reducing the business’s net income, the parent’s self-employment tax payable on net self-employment income is also reduced.
Even without the family business deduction, paying 15% SE tax and contributing to a Roth IRA seems like a good bet for the long term.
So if my kid opens a lemonade stand and grandma/auntie/cousin orders $7500 worth of lemonade, he could fully fund his Roth IRA with no taxes of any kind? I’m skipping the family business hiring a child and just giving the business ownership to the child.
No, grandma could buy $400 of lemonade. More than that, and he will need to pay 16% self employment tax on the income.
Most people don’t want to deal with child tax returns, fronting tax money, etc. They dont understand their own taxes, let alone feel comfortable making their young child a business owner. But under $400 is a start that only requires opening the IRA account. I’m not sure if the IRS even would expect you to have documentation that the $400 was “earned”.
Edit: Just for illustration purposes: My nephew is 8. If $300 is put in a Roth IRA today, by the time he is 70 years old that account should be worth close to $200,000. Without contributing another penny, ever. Yes, $200k 62 years from now will not be the same as $200k today, but it’s still pretty substantial for a starting point that costs next to nothing.
Not if I’m reading xerty’s quote above correctly – wages paid to a child under 18 (out of the sole-prop revenue) are not subject to FICA or payroll taxes.
You’re misreading it. A parent’s sole prop can pay their children without employment taxes. You would have to own and report the business/income, then pay your kid a wage for working for your business. As I said initially, if you have a business that can employ your kids, it opens up a ton of other possibilities.
A child’s sole prop business is just that - their sole prop business.
Generally, no. But you do have a break-even business on your taxes that supposedly collected a bunch of money and paid it all to your own kid, and your kid has substantial undocumented employment income. Word is this is a flag for IRS auditing, because packing a kid’s IRA with fake earned income is apparently a common scam.
You know what I mean, a child having $7k “earned’“ income based on nothing more than dad saying it wasn’t a gift (even your manufactured documentation will indicate this). And don’t forget your state may require you collect sales tax for that much lemonade. It keeps snowballing what you need to do to keep all the i’s dotted and t’s crossed.
When it becomes available, the reports thusfar make it sound like a good option. But I also suspect it will be the Democrat version of Obamacare, with them constantly trying to get rid of it jsut because of who’s getting credit for it.
What I really need is a plan for my kid’s savings account balance. Full disclosure, she is unofficially adopted (have court-ordered permanent custody, but havent taken the final step of formal adoption). She gets monthly social security survivor benefits from her mother. By the time she graduates (and the payments stop), it will be over $30k
The benefit is intended to help provide support for the child, but I’ve had it deposited into her savings account and left untouched, with the plan to present the account to her as a posthumous gift from her mother. So I dont want to tie the money up in a IRA or 529 plan, and hesitate putting it at risk in the market. But 3% APY for the next 4 years is really, really tough to look at.
I would not expect them to go beyond changing the name or how it is administered, maybe. It’s kind of odd that they plan to have the Treasury administer it (at least based on my reading of the IRS form 4547). My guess is the Treasury will outsource actual investment to investment firms. This is different from how we do all other investments, except Social Security, which does not invest in the market.
When you say “her savings account”, is it literally in her name, or is in your name but for her? Most advice I’ve read suggest not giving an 18-y-o a bunch of money, because they are very likely to blow it on stupid stuff. Common suggestions say to give some around 25 and the rest around 30.
So they can target who gets the business. Maybe to pay off political loyalty, or maybe paranoia that the wrong people will intentionally sabotage results to make it look bad. Both reasons seem to be right up Trump’s alley.
Yes, it’s hers in her name, but she doesnt know about it. And I have no qualms about hiding it from her until I’m comfortable handing it over, but given the sentimental nature it kind of is intended for stupid stuff anyways. At least to an extent.
LoL. That’s fucked up. It would only be worse if it was Edward Jones or Ameriprise or some other shitty place that charges ridiculous fees for doing nothing.
Agreed. State health dept will want to inspect the lemons and other ingredients. OSHA may need to inspect the prep site of said lemonade. Oh, and depending upon your state, you may get a visit from “Big Lou” with the citrus growers (mafia) association. He’s just checking in and may accidentally knock over the stand’s table and break some bowls. Just a coincidence.
