Author Topic: Question on behalf of my niece regarding Roth IRA  (Read 2055 times)

Sojourner

  • Stubble
  • **
  • Posts: 129
Question on behalf of my niece regarding Roth IRA
« on: August 17, 2015, 11:09:18 PM »
My 18yo niece is just about to begin college.  She has a few thousand dollars saved and would like to begin her retirement savings.  This comes after a discussion with her telling how far ahead a young person would be who had the great advantage of an early start and steady saving discipline.

She looked into it and was told she'd need to be employed in order to set up the Roth IRA and make contributions.  My question is what would be considered a "job" that would meet minimum requirements.  I mean, are we talking baby sitting job, or something more significant?  Uber driver who takes on 1 or 2 taxi jobs a year?

Ideas or insight appreciated.

Thanks.

MDM

  • Walrus Stache
  • *******
  • Posts: 9601
Re: Question on behalf of my niece regarding Roth IRA
« Reply #1 on: August 17, 2015, 11:23:35 PM »
It needs to be "earned income" as the IRS would see it.  So yes, baby sitting and/or Uber would qualify - but she can contribute only the amount she earns doing the baby sitting and/or Uber.

See http://forum.mrmoneymustache.com/investor-alley/where-to-start-a-child's-roth-ira-with-very-low-income/ and links therein for related discussion.

Frankies Girl

  • Magnum Stache
  • ******
  • Posts: 3014
  • Age: 81
  • Location: The laboratory
  • Typical Ghoul Next Door
Re: Question on behalf of my niece regarding Roth IRA
« Reply #2 on: August 17, 2015, 11:25:49 PM »
It is my understanding that she needs to have earned at least the amount she plans to use to fund the Roth (or traditional) IRA in that calendar year, and to contribute, they go by taxable income. That means to be safe, she has to report that amount on her tax return. It really doesn't matter what the job was - babysitting, mowing lawns, petsitting, cleaning...   If she wants to open an IRA, then she needs to report the income to the IRS for that tax year, i.e. open and fund an IRA for say $2,000; then she needs to make sure and file a 2015 tax return showing that income, even if she owes no actual taxes on it (for the paper trail in the unlikely event that she is challenged years from now about having actual earned income - it's a CYA move basically).

Keep in mind also that the maximum anyone can contribute to an IRA is (for 2015) $5,500 total.

See these posts for a better explanation:
http://www.investopedia.com/articles/personal-finance/110713/benefits-starting-ira-your-child.asp

http://www.freemoneyfinance.com/2010/02/why-i-report-my-daughters-babysitting-income-to-the-irs.html

http://www.chicagotribune.com/business/yourmoney/sns-kidsandmoney-grandkid-roth-fund-story.html



Sojourner

  • Stubble
  • **
  • Posts: 129
Re: Question on behalf of my niece regarding Roth IRA
« Reply #3 on: August 17, 2015, 11:39:07 PM »
Thank you both for the awesome help!  Maybe she can get a job on campus to meet the reqts.   Was hoping it would be a little more simple to comply.  Welcome to adulthood.

MDM

  • Walrus Stache
  • *******
  • Posts: 9601
Re: Question on behalf of my niece regarding Roth IRA
« Reply #4 on: August 17, 2015, 11:56:11 PM »
It needs to be "earned income" as the IRS would see it.
It is my understanding that she needs to have earned at least the amount she plans to use to fund the Roth (or traditional) IRA in that calendar year, and to contribute, they go by taxable income.
I think FG & I are saying the same thing, but just to be sure: the income eligible for the IRA is found from values on the front page of form 1040: e.g., line 7 and line 21 would most likely apply to your niece.  It is not the "Taxable income" found on line 43 of form 1040.  It's unfortunate that the IRS uses the phrase "taxable compensation" (see http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits) because that might be misleading.

Quote
That means to be safe, she has to report that amount on her tax return. It really doesn't matter what the job was - babysitting, mowing lawns, petsitting, cleaning...   If she wants to open an IRA, then she needs to report the income to the IRS for that tax year, i.e. open and fund an IRA for say $2,000; then she needs to make sure and file a 2015 tax return showing that income, even if she owes no actual taxes on it (for the paper trail in the unlikely event that she is challenged years from now about having actual earned income - it's a CYA move basically).
Certainly not wrong to file.  See http://forum.mrmoneymustache.com/investor-alley/ira-for-baby/ for discussion on whether or not it is required.