Author Topic: Retirement account for teen?  (Read 1394 times)

LindseyS

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Retirement account for teen?
« on: June 05, 2019, 04:00:12 PM »
I have a 14 year old who does quite well babysitting. What would be the best way for her to start investing for the future? She is interested in doing more than just putting money in a saving account.

RWD

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Re: Retirement account for teen?
« Reply #1 on: June 05, 2019, 04:25:52 PM »
Roth IRA would probably be a good option.

MDM

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Re: Retirement account for teen?
« Reply #2 on: June 05, 2019, 04:29:12 PM »
When talking with Fidelity/Schwab/Vanguard, you might need to add the word "custodial" in front of Roth IRA.

See Where to start a child's Roth IRA with very low income? for more.

ontheway2

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Re: Retirement account for teen?
« Reply #3 on: June 06, 2019, 11:12:05 AM »
Is she filing tax returns and paying self employment taxes? That is the only way to open a retirement account as someone babysitting. If she is sitting for cash, it would probably be better to keep it in a high yield savings account for short term needs and open the IRA once she gets a W2 type job (or fully becomes self employed)

Indio

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Re: Retirement account for teen?
« Reply #4 on: June 06, 2019, 11:17:37 AM »
I have custodial ira for both of my children. Never needed a w2 to set it up for them or file taxes because income is so low.

ontheway2

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Re: Retirement account for teen?
« Reply #5 on: June 07, 2019, 07:21:10 AM »
I have custodial ira for both of my children. Never needed a w2 to set it up for them or file taxes because income is so low.

Vanguard has never asked me for proof of income either, and my amounts are not so low. That is just not their place. It is the IRS you are hoping doesn't catch up to you since you are committing tax fraud assuming the amounts are over $400/year. I figure that is the case for OP since it was said the daughter is "doing quite well."  W2 income will push the requirement to file to around $1100, plus the tax liability should be practically zero since FICA will already be taken care of; that is why I figure it is best to wait until then unless one is doing well enough that they file self-employment returns prior.

Custodial IRA accounts require all contributions to be from "earned income"

https://www.schwab.com/public/schwab/investing/accounts_products/accounts/ira/custodial_ira

The IRS requires tax returns be filed for net self-employment income over $400

https://www.irs.gov/taxtopics/tc554

« Last Edit: June 07, 2019, 07:33:39 AM by ontheway2 »

MDM

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Re: Retirement account for teen?
« Reply #6 on: June 07, 2019, 10:22:30 AM »
A dependent child whose sole income is $432 or less from self-employment
- has no need to file a tax return
- may have the amount of self-employment income contributed to a custodial Roth IRA.

What one chooses to do is a different question.

ontheway2

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Re: Retirement account for teen?
« Reply #7 on: June 07, 2019, 10:37:09 AM »
A dependent child whose sole income is $432 or less from self-employment
- has no need to file a tax return
- may have the amount of self-employment income contributed to a custodial Roth IRA.

What one chooses to do is a different question.

So $432/year would be the limit to contribute to the IRA then and still not file a return? A little more than the $400 I stated, but pretty close. Anyone know of a fund you can get into for less than $500, or would it just have to sit in a money market fund?

Do you have advice on what types of proof should be kept to substantiate the earned income? Just invoice/receipts?

Edit: I just ran the calculator on the IRS website with self-employment income of $415.  It still states that one must file since it is over $400, even as a dependent


Do I need to file a tax return?

You are required to file a tax return for 2018 


You have a special situation.

You had net earnings from self-employment of at least $400.


Edit 2: I'm just saying it is kind of crazy to tell the IRS in one place (via IRA contributions) that a child made more than $400 (assuming more than $400 was contributed) and at the same time tell them the child had minimal income if any (not filing) as it seems that would be a red flag at some point.
« Last Edit: June 07, 2019, 11:03:59 AM by ontheway2 »

MDM

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Re: Retirement account for teen?
« Reply #8 on: June 07, 2019, 11:10:55 AM »
From https://www.irs.gov/pub/irs-pdf/i1040sse.pdf:
Quote
You must file Schedule SE if:
•The  amount  on  line  4  of  Short Schedule SE or line 4c of Long Sched-ule SE is $400 or more

The amount on line 4 is 92.35% of the Schedule C income.

ontheway2

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Re: Retirement account for teen?
« Reply #9 on: June 07, 2019, 11:14:40 AM »
From https://www.irs.gov/pub/irs-pdf/i1040sse.pdf:
Quote
You must file Schedule SE if:
•The  amount  on  line  4  of  Short Schedule SE or line 4c of Long Sched-ule SE is $400 or more

The amount on line 4 is 92.35% of the Schedule C income.

awesome. thanks

ontheway2

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Re: Retirement account for teen?
« Reply #10 on: June 07, 2019, 12:00:11 PM »
Another thought - does anyone have concerns over not having a business license; would you get a business license? Would claiming having a business cause red flags with the state/county without one?

MDM

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Re: Retirement account for teen?
« Reply #11 on: June 07, 2019, 12:12:15 PM »
Another thought - does anyone have concerns over not having a business license; would you get a business license? Would claiming having a business cause red flags with the state/county without one?
Do independent contractors need business licenses? | Nolo seems to summarize it well: "The answer depends on where you work and what you do."

In practical terms, the babysitting, soccer refereeing, lawn mowing teens are likely safe from the licensing bureaucrats, but YMMV.

ontheway2

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Re: Retirement account for teen?
« Reply #12 on: June 07, 2019, 12:15:31 PM »
Another thought - does anyone have concerns over not having a business license; would you get a business license? Would claiming having a business cause red flags with the state/county without one?
Do independent contractors need business licenses? | Nolo seems to summarize it well: "The answer depends on where you work and what you do."

In practical terms, the babysitting, soccer refereeing, lawn mowing teens are likely safe from the licensing bureaucrats, but YMMV.

Thanks again!

robartsd

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Re: Retirement account for teen?
« Reply #13 on: June 07, 2019, 12:47:43 PM »
Anyone know of a fund you can get into for less than $500, or would it just have to sit in a money market fund?
Many banks offer Roth IRA Savings Accounts and CDs. You can accumulate there until you have enough to buy into the fund you want then rollover the money. Another option would be investing in ETF shares.

A Fella from Stella

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Re: Retirement account for teen?
« Reply #14 on: June 23, 2019, 09:47:38 PM »
Wish I'd seen this; I wouldn't have started the thread called "15 year old with a Roth IRA"