Author Topic: Custodial IRA Questions  (Read 6889 times)

precrime3

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Custodial IRA Questions
« on: June 16, 2016, 06:50:27 AM »
So we're finally making some steps to open up my custodial IRA and I  have a few questions:

1. Traditional vs Roth? It's possible to convert a traditional to Roth, but I'm making below the minimum required to file a tax form so my tax rate would be 0% effectively... Which one should I go.
2. Vanguard: Through the research I've done and from the comments I've seen on this forum, VTI is the way to go for me. Later on, move up to the Admiral Share? What's the difference between the ETF and the Admiral Share?
3. Most of my income has been through self-employment (pressure washing, mowing lawns, etc.). will that be a problem, as contributions made in a custodial IRA can only match a child's income?
4. IF my parents had any money set aside for me, is there any way they could put it towards the IRA outside of matching contributions?
5. Anything else I should know?

6. VTI vs VUG?
« Last Edit: June 26, 2016, 03:41:20 AM by precrime3 »

seattlecyclone

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Re: Custodial IRA Questions
« Reply #1 on: June 16, 2016, 11:58:24 AM »
So we're finally making some steps to open up my custodial IRA and I  have a few questions:

1. Traditional vs Roth? It's possible to convert a traditional to Roth, but I'm making below the minimum required to file a tax form so my tax rate would be 0% effectively... Which one should I go.

If your marginal tax rate is 0%, go Roth.

Quote
2. Vanguard: Through the research I've done and from the comments I've seen on this forum, VTI is the way to go for me. Later on, move up to the Admiral Share? What's the difference between the ETF and the Admiral Share?

They hold the same assets. The ETF acts like a stock in that the price fluctuates throughout the trading day, and you have to buy it during the trading day. The Admiral shares are a mutual fund where you just put in a certain number of dollars to be invested at whatever the price is at the next market close. Either one is fine.

Quote
3. Most of my income has been through self-employment (pressure washing, mowing lawns, etc.). will that be a problem, as contributions made in a custodial IRA can only match a child's income?

Self-employment income is income. If you've been reporting this income on your taxes and submitting any self-employment tax that is due, using this income to qualify for IRA contributions is just fine. If you've been paid in cash under the table and aren't paying tax on it, IRA contributions might not work out for you.

Quote
4. IF my parents had any money set aside for me, is there any way they could put it towards the IRA outside of matching contributions?

There's no rule about where the money you put into the IRA comes from. Money is fungible, meaning if you deposit your paycheck directly into your IRA and then your parents give you money that you put in your savings account, there's no real difference compared to doing it the other way around. The amount you can contribute can be limited by the amount you earned. Once again, as long as you don't contribute more than you earned it doesn't matter where the exact dollars you put in the IRA came from.

MDM

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Re: Custodial IRA Questions
« Reply #2 on: June 16, 2016, 12:39:31 PM »
+1 to sc's notes.

To expand on point #3: you owe self-employment tax if your net profit from those jobs is more than $400.  See 2015 Schedule SE (Form 1040).

Contributing less than $400 to a custodial IRA and not filing taxes is less likely to attract any notice (and may be perfectly legal) than contributing more than $400 to a custodial IRA and not filing taxes (which may not meet the legal requirement).

precrime3

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Re: Custodial IRA Questions
« Reply #3 on: June 16, 2016, 03:42:37 PM »
So we're finally making some steps to open up my custodial IRA and I  have a few questions:

1. Traditional vs Roth? It's possible to convert a traditional to Roth, but I'm making below the minimum required to file a tax form so my tax rate would be 0% effectively... Which one should I go.

If your marginal tax rate is 0%, go Roth.

Quote
2. Vanguard: Through the research I've done and from the comments I've seen on this forum, VTI is the way to go for me. Later on, move up to the Admiral Share? What's the difference between the ETF and the Admiral Share?

They hold the same assets. The ETF acts like a stock in that the price fluctuates throughout the trading day, and you have to buy it during the trading day. The Admiral shares are a mutual fund where you just put in a certain number of dollars to be invested at whatever the price is at the next market close. Either one is fine.

Quote
3. Most of my income has been through self-employment (pressure washing, mowing lawns, etc.). will that be a problem, as contributions made in a custodial IRA can only match a child's income?

Self-employment income is income. If you've been reporting this income on your taxes and submitting any self-employment tax that is due, using this income to qualify for IRA contributions is just fine. If you've been paid in cash under the table and aren't paying tax on it, IRA contributions might not work out for you.

Quote
4. IF my parents had any money set aside for me, is there any way they could put it towards the IRA outside of matching contributions?

There's no rule about where the money you put into the IRA comes from. Money is fungible, meaning if you deposit your paycheck directly into your IRA and then your parents give you money that you put in your savings account, there's no real difference compared to doing it the other way around. The amount you can contribute can be limited by the amount you earned. Once again, as long as you don't contribute more than you earned it doesn't matter where the exact dollars you put in the IRA came from.

I've never done taxes before. Will I need to this year in order to open an IRA?

+1 to sc's notes.

To expand on point #3: you owe self-employment tax if your net profit from those jobs is more than $400.  See 2015 Schedule SE (Form 1040).

Contributing less than $400 to a custodial IRA and not filing taxes is less likely to attract any notice (and may be perfectly legal) than contributing more than $400 to a custodial IRA and not filing taxes (which may not meet the legal requirement).

And I gotcha, why do you say "may" be perfectly legal? Would it be best to sit down with a Vanguard financial advisor at opening to fully make sure everything's alright?

seattlecyclone

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Re: Custodial IRA Questions
« Reply #4 on: June 16, 2016, 04:07:20 PM »
I've never done taxes before. Will I need to this year in order to open an IRA?

I'm not aware of any special requirements to file a tax return in order to contribute to an IRA. However do keep in mind that your IRA contributions are limited to the lesser of $5,500 or your earned income.

When you work as an employee for someone else, they'll need to report what they paid you to the IRS on Form W-2.

When you contribute to an IRA, the IRA custodian will report this amount to the IRS on a different form.

If the IRS receives notice that you contributed to an IRA with no W-2 income, the only other option for getting earned income would then be self-employment.

You're required to file a tax return if you get at least $400 in self-employment income. So if they have no W-2s in your name, didn't receive a tax return from you, and they get a form that says you contributed more than $400 to an IRA, that could trigger an investigation.

Bottom line: do your best to follow any reporting requirements, pay the taxes that are due, and keep good records. Getting paid in cash under the table in small amounts is unlikely to lead to trouble on its own, but you can't expect to evade taxes on this money and make Roth IRA contributions based on this unreported earned income.

MDM

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Re: Custodial IRA Questions
« Reply #5 on: June 16, 2016, 08:22:58 PM »
Contributing less than $400 to a custodial IRA and not filing taxes ... may be perfectly legal....
And I gotcha, why do you say "may" be perfectly legal? Would it be best to sit down with a Vanguard financial advisor at opening to fully make sure everything's alright?
Because you aren't required to file if your self-employment net income is less than $400, or your W-2 income was less than $6300 (and you meet all the criteria listed in p501.pdf).

But just because you contribute less than $400 to a custodial IRA doesn't mean you don't have to file taxes (even if you don't owe anything) - does that make sense?

precrime3

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Re: Custodial IRA Questions
« Reply #6 on: June 17, 2016, 01:29:10 AM »
I've never done taxes before. Will I need to this year in order to open an IRA?

I'm not aware of any special requirements to file a tax return in order to contribute to an IRA. However do keep in mind that your IRA contributions are limited to the lesser of $5,500 or your earned income.

When you work as an employee for someone else, they'll need to report what they paid you to the IRS on Form W-2.

When you contribute to an IRA, the IRA custodian will report this amount to the IRS on a different form.

If the IRS receives notice that you contributed to an IRA with no W-2 income, the only other option for getting earned income would then be self-employment.

You're required to file a tax return if you get at least $400 in self-employment income. So if they have no W-2s in your name, didn't receive a tax return from you, and they get a form that says you contributed more than $400 to an IRA, that could trigger an investigation.

Bottom line: do your best to follow any reporting requirements, pay the taxes that are due, and keep good records. Getting paid in cash under the table in small amounts is unlikely to lead to trouble on its own, but you can't expect to evade taxes on this money and make Roth IRA contributions based on this unreported earned income.

I am trying to and willing to comply with the IRS but simply confused where I should go to get started on this. The bank? Vanguard? A place like H+R block? What information should I procure?

Contributing less than $400 to a custodial IRA and not filing taxes ... may be perfectly legal....
And I gotcha, why do you say "may" be perfectly legal? Would it be best to sit down with a Vanguard financial advisor at opening to fully make sure everything's alright?
Because you aren't required to file if your self-employment net income is less than $400, or your W-2 income was less than $6300 (and you meet all the criteria listed in p501.pdf).

But just because you contribute less than $400 to a custodial IRA doesn't mean you don't have to file taxes (even if you don't owe anything) - does that make sense?

I'm pretty sure my income is greater than $400 this year as I have $500 as of right now... Does this make this invalid?

MDM

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Re: Custodial IRA Questions
« Reply #7 on: June 17, 2016, 01:54:12 AM »
I am trying to and willing to comply with the IRS but simply confused where I should go to get started on this. The bank? Vanguard? A place like H+R block? What information should I procure?
Start with the three forms below for practice.  Use your estimates for all of 2016 for numbers.  The real 2016 forms will be available ~January 2017.  If you can understand the 2015 forms for practice, you should have no problem with the real 2016 forms.
2015 Form 1040 - f1040.pdf
2015 Form 1040 (Schedule C-EZ) - f1040sce.pdf
2015 Schedule SE (Form 1040) - f1040sse.pdf

Quote
I'm pretty sure my income is greater than $400 this year as I have $500 as of right now... Does this make this invalid?
Not sure what "...this invalid" refers to - in any case, see the three forms above and that (if I understand your situation correctly) should be sufficient.  If it isn't, just ask!

precrime3

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Re: Custodial IRA Questions
« Reply #8 on: June 17, 2016, 04:31:26 AM »
I am trying to and willing to comply with the IRS but simply confused where I should go to get started on this. The bank? Vanguard? A place like H+R block? What information should I procure?
Start with the three forms below for practice.  Use your estimates for all of 2016 for numbers.  The real 2016 forms will be available ~January 2017.  If you can understand the 2015 forms for practice, you should have no problem with the real 2016 forms.
2015 Form 1040 - f1040.pdf
2015 Form 1040 (Schedule C-EZ) - f1040sce.pdf
2015 Schedule SE (Form 1040) - f1040sse.pdf

Quote
I'm pretty sure my income is greater than $400 this year as I have $500 as of right now... Does this make this invalid?
Not sure what "...this invalid" refers to - in any case, see the three forms above and that (if I understand your situation correctly) should be sufficient.  If it isn't, just ask!

So all three are required? Does this mean I have to wait until January 2017 until I can open a custodial? IS the 1040 necessary? I see it more as of a side income, but please correct me if it should be classified as a business. Would business expenses go under the 1040 like buying a pressure washer and gasoline, or what? Just looking at these gives me a headache!..
« Last Edit: June 17, 2016, 04:33:46 AM by precrime3 »

MDM

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Re: Custodial IRA Questions
« Reply #9 on: June 17, 2016, 11:35:40 AM »
So all three are required? Does this mean I have to wait until January 2017 until I can open a custodial? IS the 1040 necessary? I see it more as of a side income, but please correct me if it should be classified as a business. Would business expenses go under the 1040 like buying a pressure washer and gasoline, or what? Just looking at these gives me a headache!..

Never had to file taxes before?  Is there someone local you can talk with?

You can contribute to a 2016 IRA any time between now and April 15, 2017.


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Re: Custodial IRA Questions
« Reply #10 on: June 17, 2016, 03:49:01 PM »
How much are you anticipating wanting to put into the IRA this year?  $300?  $500?  $2000?  That will tell us a lot about your anticipated cash flow. 

Is all your cash / funding coming from your sidework?  Are your parents claiming you as a dependent on their taxes? 

BTW - you're a smart cookie to be looking into this early on, like you are!  Great job!

precrime3

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Re: Custodial IRA Questions
« Reply #11 on: June 17, 2016, 07:18:58 PM »
So all three are required? Does this mean I have to wait until January 2017 until I can open a custodial? IS the 1040 necessary? I see it more as of a side income, but please correct me if it should be classified as a business. Would business expenses go under the 1040 like buying a pressure washer and gasoline, or what? Just looking at these gives me a headache!..

Never had to file taxes before?  Is there someone local you can talk with?

You can contribute to a 2016 IRA any time between now and April 15, 2017.

My dad probably knows some people. I'll let him know. And okay gotcha. But should I file taxes before contributing to an IRA to be on the safe side?
How much are you anticipating wanting to put into the IRA this year?  $300?  $500?  $2000?  That will tell us a lot about your anticipated cash flow. 

Is all your cash / funding coming from your sidework?  Are your parents claiming you as a dependent on their taxes? 

BTW - you're a smart cookie to be looking into this early on, like you are!  Great job!

I'm looking to max out contributions at $5,500. If it's possible for my parents to match me, then only half of it will be coming from my side work/ me getting a minimum wage job to increase my income. And thanks! It really is the only logical choice, until I've achieved FI everything else is secondary. 

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Re: Custodial IRA Questions
« Reply #12 on: June 17, 2016, 07:51:06 PM »
My dad probably knows some people. I'll let him know. And okay gotcha. But should I file taxes before contributing to an IRA to be on the safe side?
That's completely unnecessary.

It is necessary that you know your "Modified Adjusted Gross Income" (MAGI) is sufficient to justify the amount of IRA contribution.

See Publication 590-A (2015), Contributions to Individual Retirement Arrangements (IRAs) for MAGI calculation.

precrime3

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Re: Custodial IRA Questions
« Reply #13 on: June 18, 2016, 06:28:54 AM »
Thanks for the info. I'll definitely be needing some help from people much more knowledgeable than me, but I think it's doable.

teen persuasion

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Re: Custodial IRA Questions
« Reply #14 on: June 20, 2016, 06:03:07 AM »
So all three are required? Does this mean I have to wait until January 2017 until I can open a custodial? IS the 1040 necessary? I see it more as of a side income, but please correct me if it should be classified as a business. Would business expenses go under the 1040 like buying a pressure washer and gasoline, or what? Just looking at these gives me a headache!..

Never had to file taxes before?  Is there someone local you can talk with?

You can contribute to a 2016 IRA any time between now and April 15, 2017.

My dad probably knows some people. I'll let him know. And okay gotcha. But should I file taxes before contributing to an IRA to be on the safe side?
How much are you anticipating wanting to put into the IRA this year?  $300?  $500?  $2000?  That will tell us a lot about your anticipated cash flow. 

Is all your cash / funding coming from your sidework?  Are your parents claiming you as a dependent on their taxes? 

BTW - you're a smart cookie to be looking into this early on, like you are!  Great job!

I'm looking to max out contributions at $5,500. If it's possible for my parents to match me, then only half of it will be coming from my side work/ me getting a minimum wage job to increase my income. And thanks! It really is the only logical choice, until I've achieved FI everything else is secondary.

Just to make sure you understand this: if your income is less than $5500 this year, you can only contribute up to your net earnings (earnings - expenses).  Your parents can fund the IRA for you, in part or in whole, but can't add more to push you over your earnings total. I.e., if your earnings were $2k, that is the max you can contribute.

As long as you can estimate well what your earnings will be, you can contribute anytime between Jan 1, 2016 and Apr 15, 2017 for 2016.  You can contribute all at once, or in chunks, or monthly, however you like. 

You should look into minimum initial investment amounts - some funds have $3k minimums to start, or $10k for admiral funds.  You can start in a low min fund first, and then swap it to admiral later when you reach $10k.

Don't let the tax forms intimidate you - a good portion of the form 1040 does not apply to you.  Take it line by line, read the instructions, figure out which parts DO apply to you and what info is important to save for filing. Find someone who can help explain the tax forms and process to you.  I walked my kids thru filing their taxes when they had their first jobs as teens, so they could begin to learn the process.

Keep asking questions!

precrime3

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Re: Custodial IRA Questions
« Reply #15 on: June 20, 2016, 07:15:45 AM »


Just to make sure you understand this: if your income is less than $5500 this year, you can only contribute up to your net earnings (earnings - expenses).  Your parents can fund the IRA for you, in part or in whole, but can't add more to push you over your earnings total. I.e., if your earnings were $2k, that is the max you can contribute.

Can you get a link to where it says parents can fund the IRA  for me? I just want to make sure.

And the age-old question: Roth vs Traditional IRA? I know many argue Roth in my case because right now my tax rate is 0% ( I make less than the $6000+ or whatever is the minimum). But what about in the future when I get a minimum wage job to increase my income further? Or when I start getting (hopefully) paid internships in college, or an actual full-time job after college? Wouldn't traditional be the better choice? Or is Roth truly the way? And is that because of the aforementioned 0% tax rate?

Wouldn't it be better to go with a traditional, and slowly convert it over to Roth and cover the income using standard deductions? Or is my logic flawed somewhere?

Also (posted about this in my journal linked in my sig), we're closing a bank account in my name here in the PI which has approximately $4,000 in it and I want to put it straight to work. Should we wait till we're back on US soil to open a Vanguard custodial IRA? As I'm assuming there's paperwork to be had, and not sure if my SSN is something my dad has on had.

And regarding what exact fund, I'm split between the VTSMX (mutual fund) and VTI (etf). Besides account minmums, both of which I satisfy, the only difference I see is expense ratios, with VTIs 3x lower 0.05%. So shouldn't the logical thing be to go with the VTI? Or am I missing something else here? How about international exposure? Should that be something I should look into?

As long as you can estimate well what your earnings will be, you can contribute anytime between Jan 1, 2016 and Apr 15, 2017 for 2016.  You can contribute all at once, or in chunks, or monthly, however you like. 

Plan is to put the $4,000 all at once into whatever fund I/me+MMMforums/we decide. Then contribution as detailed below.

For the situation, the plan would be to any excess money I have into the IRA. Right now I'm saving $300/month for a senior trip to Alaska, so any money over that I'd put here.

How would this affect my parents tax filings? My mom also brought up the concern today for any financial need scholarships, which I quickly dismissed since my scholarship is merit-based but I thought I'd bring that up also. Ie; could opening up an IRA  bring any negative/unforeseen effects or consequences into our lives?

And thank you very much, the plan is to continue to ask questions. That's all I have for now.


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Re: Custodial IRA Questions
« Reply #16 on: June 20, 2016, 08:28:07 AM »
And the age-old question: Roth vs Traditional IRA? I know many argue Roth in my case because right now my tax rate is 0% ( I make less than the $6000+ or whatever is the minimum).
Seems a good argument - what concerns you?

Quote
But what about in the future when I get a minimum wage job to increase my income further? Or when I start getting (hopefully) paid internships in college, or an actual full-time job after college? Wouldn't traditional be the better choice? Or is Roth truly the way? And is that because of the aforementioned 0% tax rate?
At some point traditional will be better for you.  When that happens, use a traditional account.  You aren't locked into using one or the other for your entire career.

precrime3

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Re: Custodial IRA Questions
« Reply #17 on: June 20, 2016, 06:30:02 PM »
And the age-old question: Roth vs Traditional IRA? I know many argue Roth in my case because right now my tax rate is 0% ( I make less than the $6000+ or whatever is the minimum).
Seems a good argument - what concerns you?

Quote
But what about in the future when I get a minimum wage job to increase my income further? Or when I start getting (hopefully) paid internships in college, or an actual full-time job after college? Wouldn't traditional be the better choice? Or is Roth truly the way? And is that because of the aforementioned 0% tax rate?
At some point traditional will be better for you.  When that happens, use a traditional account.  You aren't locked into using one or the other for your entire career.

Ahh I understand now. Are there any special considerations to understand while maintaining two? Also, does the same argument hold true for 401ks? So in that case, since I'll probably be in a higher tax bracket when 401ks are available to me compared to in retirement, a traditional would be the way to go?

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Re: Custodial IRA Questions
« Reply #18 on: June 20, 2016, 07:05:54 PM »
Are there any special considerations to understand while maintaining two?
1) Remember which is which
2) Know the rules on how much you can contribute/deduct
3) See https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras-1 and https://www.irs.gov/retirement-plans/roth-iras for more details.

But the short answer is "no". :)

Quote
Also, does the same argument hold true for 401ks? So in that case, since I'll probably be in a higher tax bracket when 401ks are available to me compared to in retirement, a traditional would be the way to go?
Bingo!  Exactly correct.

precrime3

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Re: Custodial IRA Questions
« Reply #19 on: June 20, 2016, 09:33:18 PM »
Thanks very much guys. That's about all of the questions I have for IRAs as of now. I'll probably update the situation when I open up the IRA through my journal, which is located in my sig (shameless plug). Thanks for the help as always guys!

precrime3

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Re: Custodial IRA Questions
« Reply #20 on: June 20, 2016, 11:49:55 PM »
I almost forgot: balancing and TLH! Are these things I have to worry about? When/how often should i do both if I should be?

precrime3

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Re: Custodial IRA Questions
« Reply #21 on: June 22, 2016, 12:50:09 AM »
Also, where are the forms to open a custodial IRA on the Vanguard website?!

https://personal.vanguard.com/us/literature/openaccountforms

According to this Youtube Video   that has a similar situation, I should be looking for UTMA account?

Which I do find on the vanguard website I listed, it's called "Uniform Gifts or Transfers to Minors Enrollment Kit". Is this what I want to complete? It can be completed online it seems.

precrime3

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Re: Custodial IRA Questions
« Reply #22 on: June 24, 2016, 04:50:28 AM »
Clarification on this please. I was reading the website below:

http://budgeting.thenest.com/can-parent-contribute-childs-ira-25445.html

And it says parents can only contribute equivalent to how much a child's earned income was. Say I earned $2000 for this year, the total in my IRA can be $4000?

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Re: Custodial IRA Questions
« Reply #23 on: June 24, 2016, 08:32:01 AM »
Clarification on this please. I was reading the website below:

http://budgeting.thenest.com/can-parent-contribute-childs-ira-25445.html

And it says parents can only contribute equivalent to how much a child's earned income was. Say I earned $2000 for this year, the total in my IRA can be $4000?

No, there's no special limit for parental contributions. The total limit is the lesser of your income or $5,500, whether you contribute that money, your parents do, or some combination of the two.

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Re: Custodial IRA Questions
« Reply #24 on: June 24, 2016, 10:25:46 AM »
And it says parents can only contribute equivalent to how much a child's earned income was. Say I earned $2000 for this year, the total in my IRA can be $4000?
No.

In this situation, the maximum that can be contributed is $2000.  That $2000 can come in any combination from you and your parents.  E.g., $0 from you and $2000 from your parents, or $2000 from you and $0 from your parents, or $197.21 from you and $1,802.89 from your parents, etc.

I'm assuming you mean "contributed to my IRA this year" where it says "in my IRA" - correct?

teen persuasion

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Re: Custodial IRA Questions
« Reply #25 on: June 24, 2016, 03:15:18 PM »
I almost forgot: balancing and TLH! Are these things I have to worry about? When/how often should i do both if I should be?

TLH doesn't make sense inside an IRA since contributions grow tax free until withdrawal.  TLH might make sense in a taxable account.

Rebalancing is to return your holdings back to your desired asset allocation after time/growth/loss has shifted the percentages.  You should first determine what your desired AA is, to know if things need rebalancing.  You can rebalance by directing new contributions toward the underweight portions, or sell some of the overweight portions, then buy the underweight stuff.  This forces you to sell high (capturing gains) and buy low. 

teen persuasion

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Re: Custodial IRA Questions
« Reply #26 on: June 24, 2016, 03:46:38 PM »

teen persuasion

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Re: Custodial IRA Questions
« Reply #27 on: June 24, 2016, 04:17:18 PM »


And the age-old question: Roth vs Traditional IRA? I know many argue Roth in my case because right now my tax rate is 0% ( I make less than the $6000+ or whatever is the minimum). But what about in the future when I get a minimum wage job to increase my income further? Or when I start getting (hopefully) paid internships in college, or an actual full-time job after college? Wouldn't traditional be the better choice? Or is Roth truly the way? And is that because of the aforementioned 0% tax rate?

Wouldn't it be better to go with a traditional, and slowly convert it over to Roth and cover the income using standard deductions? Or is my logic flawed somewhere?



How would this affect my parents tax filings? My mom also brought up the concern today for any financial need scholarships, which I quickly dismissed since my scholarship is merit-based but I thought I'd bring that up also. Ie; could opening up an IRA  bring any negative/unforeseen effects or consequences into our lives?


Traditional IRAs can net you a tax break up front, but the catch is that you pay tax when you withdraw.  Roth IRAs have no tax break up front (you put in money you pay taxes on), but the perk is that everything comes out tax free (if you follow the rules).

So if you will owe no taxes now, choose the Roth -it goes in tax free, and comes out tax free.  Later, when you are earning more and are looking for a tax break, traditional may be a better choice.  You can contribute to either, or both, each year for a TOTAL of up to the max of $5500 or your earnings, whichever is LESS.  If you earned $3k, you could contribute $1k Roth and $2k traditional, OR $3k Roth OR $3k traditional (total <=$3k).  If you earn $7k, you could contribute $3k Roth and $2500 traditional, OR $5500 Roth OR $5500 traditional (total<= $5500).

Contributing to an IRA shouldn't affect your parents' taxes, only yours.  I can't think  of a way this would negatively affect your FAFSA.  It may be beneficial - assets in retirement accounts are not reported on the FAFSA, but other assets like savings accounts are reported.  So transferring assets from taxable to retirement takes them out of the asset calculation.  Student assets are assessed at 50%, rather than the max of 5.65% for parent assets.

MustacheAndaHalf

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Re: Custodial IRA Questions
« Reply #28 on: June 24, 2016, 04:25:39 PM »
With an income of $2,000 you're limited to $2,000 contributed to your IRA this year.  The IRS doesn't care how the money got there, just that it's less than your paychecks (or earned income from babysitting, tutoring, etc).  Your parents can gift you the money.

Good luck on expecting a 0% tax bracket in the future... which is why a Roth IRA makes sense.  You pay 0% tax, and put it into a tax account where it never gets taxed again.  You can then let it grow, or remove up to that original $2,000 tax free.  If you remove growth, then it's a penalty (the account grows to $2,500 and you remove it all - then you pay a penalty on the $500 growth).  So it's very valuable thing, and at 0% tax bracket it's a really good idea.

As to taxes, visit one of the free online tax calculators from a well known company.  The biggest 3 tax software brands are TurboTax, H&R Block, and TaxAct.  You'll get your first look at tax software, which is an easier way to start than trying to understand IRS forms yourself.  I think all you're looking at is income, and Roth IRA contribution.  The rest will be answering "no" to a lot of situations that don't apply.

precrime3

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Re: Custodial IRA Questions
« Reply #29 on: June 24, 2016, 07:27:33 PM »
Clarification on this please. I was reading the website below:

http://budgeting.thenest.com/can-parent-contribute-childs-ira-25445.html

And it says parents can only contribute equivalent to how much a child's earned income was. Say I earned $2000 for this year, the total in my IRA can be $4000?

No, there's no special limit for parental contributions. The total limit is the lesser of your income or $5,500, whether you contribute that money, your parents do, or some combination of the two.

Thanks for the clarification.

And it says parents can only contribute equivalent to how much a child's earned income was. Say I earned $2000 for this year, the total in my IRA can be $4000?
No.

In this situation, the maximum that can be contributed is $2000.  That $2000 can come in any combination from you and your parents.  E.g., $0 from you and $2000 from your parents, or $2000 from you and $0 from your parents, or $197.21 from you and $1,802.89 from your parents, etc.

I'm assuming you mean "contributed to my IRA this year" where it says "in my IRA" - correct?

So my income basically sets an artificial limit, with a real limit at $5,500. But the IRS doesn't care who contributes the money to the IRA, just make sure it doesn't go over the limit?

Try reading this for some basics on custodial IRAs : http://www.investopedia.com/articles/personal-finance/110713/benefits-starting-ira-your-child.asp

Read. Very helpful, thanks.



And the age-old question: Roth vs Traditional IRA? I know many argue Roth in my case because right now my tax rate is 0% ( I make less than the $6000+ or whatever is the minimum). But what about in the future when I get a minimum wage job to increase my income further? Or when I start getting (hopefully) paid internships in college, or an actual full-time job after college? Wouldn't traditional be the better choice? Or is Roth truly the way? And is that because of the aforementioned 0% tax rate?

Wouldn't it be better to go with a traditional, and slowly convert it over to Roth and cover the income using standard deductions? Or is my logic flawed somewhere?



How would this affect my parents tax filings? My mom also brought up the concern today for any financial need scholarships, which I quickly dismissed since my scholarship is merit-based but I thought I'd bring that up also. Ie; could opening up an IRA  bring any negative/unforeseen effects or consequences into our lives?


Traditional IRAs can net you a tax break up front, but the catch is that you pay tax when you withdraw.  Roth IRAs have no tax break up front (you put in money you pay taxes on), but the perk is that everything comes out tax free (if you follow the rules).

So if you will owe no taxes now, choose the Roth -it goes in tax free, and comes out tax free.  Later, when you are earning more and are looking for a tax break, traditional may be a better choice.  You can contribute to either, or both, each year for a TOTAL of up to the max of $5500 or your earnings, whichever is LESS.  If you earned $3k, you could contribute $1k Roth and $2k traditional, OR $3k Roth OR $3k traditional (total <=$3k).  If you earn $7k, you could contribute $3k Roth and $2500 traditional, OR $5500 Roth OR $5500 traditional (total<= $5500).

Contributing to an IRA shouldn't affect your parents' taxes, only yours.  I can't think  of a way this would negatively affect your FAFSA.  It may be beneficial - assets in retirement accounts are not reported on the FAFSA, but other assets like savings accounts are reported.  So transferring assets from taxable to retirement takes them out of the asset calculation.  Student assets are assessed at 50%, rather than the max of 5.65% for parent assets.

Okay, thats awesome. Even more incentive to put it in the IRA.

With an income of $2,000 you're limited to $2,000 contributed to your IRA this year.  The IRS doesn't care how the money got there, just that it's less than your paychecks (or earned income from babysitting, tutoring, etc).  Your parents can gift you the money.

Good luck on expecting a 0% tax bracket in the future... which is why a Roth IRA makes sense.  You pay 0% tax, and put it into a tax account where it never gets taxed again.  You can then let it grow, or remove up to that original $2,000 tax free.  If you remove growth, then it's a penalty (the account grows to $2,500 and you remove it all - then you pay a penalty on the $500 growth).  So it's very valuable thing, and at 0% tax bracket it's a really good idea.

As to taxes, visit one of the free online tax calculators from a well known company.  The biggest 3 tax software brands are TurboTax, H&R Block, and TaxAct.  You'll get your first look at tax software, which is an easier way to start than trying to understand IRS forms yourself.  I think all you're looking at is income, and Roth IRA contribution.  The rest will be answering "no" to a lot of situations that don't apply.

Will do. Thanks for the tip.

precrime3

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Re: Custodial IRA Questions
« Reply #30 on: June 24, 2016, 07:32:55 PM »
Oh and Asset Allocation: 100% VTI/VTSAX. Probably forever, unless there's some compelling reason i need to add something else?

precrime3

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Re: Custodial IRA Questions
« Reply #31 on: June 26, 2016, 03:43:10 AM »
Been doing some roaming on the internet, and something caught my eye: growth stocks. Sure they're riskier, but I'm 17, I can take the risk. And it seems the performance is better than VTI ($23,000 vs $20,000 using Vanguards tools) over 10 years with $10,000 invested. Fees are higher at 0.08% for the ETF, but not too much higher.

What's the take on growth stocks?

MDM

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Re: Custodial IRA Questions
« Reply #32 on: June 26, 2016, 09:59:46 AM »
What's the take on growth stocks__________?

See Callan periodic table of investment returns - Bogleheads for pretty much any fill-in-the-blank above.

For growth stocks in particular, recently they have done well.  Ten years ago they were finishing five years of under-performance.  Going forward...?

precrime3

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Re: Custodial IRA Questions
« Reply #33 on: June 26, 2016, 06:14:25 PM »
What's the take on growth stocks__________?

See Callan periodic table of investment returns - Bogleheads for pretty much any fill-in-the-blank above.

For growth stocks in particular, recently they have done well.  Ten years ago they were finishing five years of under-performance.  Going forward...?

Thank you so much for this, I'll probably look at this and end up sticking with VTI lol.