Author Topic: Roth IRA for minors and young adults  (Read 827 times)

FiguringItOut

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Roth IRA for minors and young adults
« on: April 06, 2017, 11:30:57 AM »
I've been toying with idea of starting Roth IRAs for my kids at some point.  They are 12 and 14 right now.

1. I understand that they have to have earned income in order to contribute.  However, what happens if they don't have any record of such income (i.e. babysitting)?  Can it still be called earned income for purpose of Roth IRA?  Do they need to file their own tax return if they only earned few hundred dollars babysitting? 

2. How will the IRA in their name affect their college financial aid?  I'm thinking of FAFSA and the fact that child's savings are counted at something like 50% towards expected family contribution, vs parents non-retirement savings are only at about 25%?

3. How will this affect me filing a tax return if the kid is still claimed as my dependent?  Even after they turn 18 and are in college.

4.  Should I possible wait till they start college and then contribute for each of them for 4 years ($20K each)?   My though it to sort of put away $20K for each of them and then forget about the account and let it just sit and grow for years and years.  Also, can I open an account (custodial account) and not even tell them about it for a while?

Anything else I should consider?






seattlecyclone

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Re: Roth IRA for minors and young adults
« Reply #1 on: April 06, 2017, 03:07:29 PM »
I've been toying with idea of starting Roth IRAs for my kids at some point.  They are 12 and 14 right now.

1. I understand that they have to have earned income in order to contribute.  However, what happens if they don't have any record of such income (i.e. babysitting)?  Can it still be called earned income for purpose of Roth IRA?  Do they need to file their own tax return if they only earned few hundred dollars babysitting?

The instructions for Form 1040 state that kids generally don't have to file a tax return unless their unearned income is over $1,050, their earned income is over $6,300, or their gross income is more than ($earned_income + $350). However anyone with more than $400 of self-employment income is required to file. That requirement would probably cover babysitting unless it's a very small amount of work.

Filing might be a good idea even if not required just to help substantiate the IRA contribution.

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2. How will the IRA in their name affect their college financial aid?  I'm thinking of FAFSA and the fact that child's savings are counted at something like 50% towards expected family contribution, vs parents non-retirement savings are only at about 25%?

The FAFSA completely ignores the value of retirement accounts.

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3. How will this affect me filing a tax return if the kid is still claimed as my dependent?  Even after they turn 18 and are in college.

I don't think it would at all.

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4.  Should I possible wait till they start college and then contribute for each of them for 4 years ($20K each)?   My though it to sort of put away $20K for each of them and then forget about the account and let it just sit and grow for years and years.  Also, can I open an account (custodial account) and not even tell them about it for a while?

I don't think there's any advantage to waiting. However once they turn 18 I don't think you would have any right to stop them from withdrawing from the retirement account if they so chose, and keeping it secret from them at that point is likely unethical if not illegal.