Have you started a Roth IRA for your child?

[meadow lark]

I’ve seen info here about starting Roth IRA’s for kids and I was thinking about selling my grandson’s artwork to friends and family to get him some earned income (after reading about it here).  A friend reminded me of the need to have a business license to sell artwork.  Agh!  So there is another $75.

What have other people done and is it worth it?

[MaybeBabyMustache]

Yes, I've opened up a custodial IRA for my 15 year old. He is a soccer ref, so all of his earned income can go into the IRA. My 16 year old just started reffing, and has a summer job lined up, so this is a good reminder to open another IRA for him as well. We're using Fidelity.

[secondcor521]

Yes.  All three of mine did the usual teenage jobs and opened Roth IRAs with Schwab.  In my state, no business licenses were required.  (You might check the rules in your state too to see if there's a way for your grandson to avoid the business license expense.  In my state no license is required for sole proprietorships with the person's name in the business name.)

The actual investments themselves were small and may not make a big difference in the long run.  However, the various lessons of setting aside savings, being comfortable opening investment accounts and buying mutual funds and dealing with volatility are very well worth it in my opinion.

[reeshau]

The actual investments themselves were small and may not make a big difference in the long run.  However, the various lessons of setting aside savings, being comfortable opening investment accounts and buying mutual funds and dealing with volatility are very well worth it in my opinion.

You are correct that the lessons and habits are most important.  But for grins, I put in a compounding calculator at 7%  return after inflation for 50 years. (just to round it off)  Each $100 put in now will be worth $2,945.70.  No, not life-changing.  But multiply that by 10x or 20x, and you child could be buying themselves 1 year of FI.  That's a nice gift to think about.

[Hadilly]

Yes. All three of mine have one. Dog walking, baby sitting, plant watering money all goes into it. My oldest will work as a lifeguard this summer and put in all that up to the limit.

They also have investment custodial accounts. I set them up at Vanguard. Whatever they choose to put in, I match 100%.

I think normalizing saving and investment is important.

[StarBright]

The actual investments themselves were small and may not make a big difference in the long run.  However, the various lessons of setting aside savings, being comfortable opening investment accounts and buying mutual funds and dealing with volatility are very well worth it in my opinion.

Thanks for sharing this! I am hoping to do the same thing when my kids are old enough to get jobs, specifically for the adulting practice. Our current plan is to match whatever portion they decide to save.

And not for nothing, I started a ROTH for myself in undergrad (because I am a nerd), and by the time the housing market collapsed in 2008-2009 I had more than enough in there to take out the allowed 10k for a house downpayment. Without it, We would have struggled to have enough for a downpayment because DH was a student and I didn't make a ton. It basically enabled us to get into the housing market.

[brandon1827]

Mostly PTF

I recently read some blog posts about building generational wealth and starting early is key. My son is only 12, but as soon as he begins working we will be setting something similar up for him and matching 100% to teach him good saving/investing habits and help set him up for the beginnings of a comfortable retirement.

[zolotiyeruki]

Both of my work-eligible teens have Roth IRAs. They can draw on the contributions for college if needed, and if not, it'll continue to grow tax-free.

[Michael in ABQ]

I opened savings accounts for our three oldest kids a few weeks ago (ages 10-13). I'll be putting them on payroll with our business this summer and paying them minimum wage ($11.50/hour). 1/3 will be for them to keep to buy toys, etc. 1/3 for savings (car or other major purchase) and 1/3 will be put into a Roth IRA. Our oldest will probably work about 6 hours one day a week so that will be about $100 a month. Not huge but they'll thank me when they're older. Even getting $1,000 in there by the time they're 18 will put them ahead of the game.

[Chris Pascale]

At 14 they get working papers. With first check, begins a $25 auto deposit each month.

I recently told daughter no. 3 how excited I was for her to start working. She was kind of shocked that I expect her to get a job so soon, which is kind of weird because, you know, she's the 3rd kid.

Edited to Add: Not only is she the 3rd kid, but I've also told her she's not my favorite, so why wouldn't she think she's getting a job!

[SEAK]

Looking at a Roth IRA for our 15 year old. He spent the summer working as a deckhand on a gill-netter and made around $10k. We discussed putting $1k in a ROTH, $1k in checking(also get a debit card), and the remaining $8k into VTSAX. Trying to decide if we should put the VTSAX in a Vanguard account under my name or his. Only advantage I know of to have the account under my name would be for college financial aid eligibility. We already have a vanguard account under my name with VTSAX we've been saving for him and plan to give him when he's college age.

Any thoughts on whose name the Vanguard VTSAX shares should go under, his or ours?? I'd prefer for it to be under his name so he can open the account, purchase the shares, and in the future contribute when he'd like from his checking account.

[Michael in ABQ]

I ended up starting Custodial Roth IRAs for a few of my kids with Fidelity. Pretty simple process. For the second and third kids it saved my information, so I just had to put in some basic info for my kids (name, DOB, SS#) and didn't have to reenter our address and my information. Also, it was nice that as soon as I initiated the ACH transfer of fund from their savings account into the Fidelity account that I was immediately able to use those funds to purchase an index fund - no waiting 2-3 days for the ACH transfer to actually occur. I just put it all into FZROX - Fidelity Zero Total Market Index, basically identical to VTSAX.

[MDM]

We discussed putting $1k in a ROTH, $1k in checking(also get a debit card), and the remaining $8k into VTSAX.

One can own VTSAX in a Roth account, so putting $6K into the Roth account merits consideration.

[secondcor521]

Looking at a Roth IRA for our 15 year old. He spent the summer working as a deckhand on a gill-netter and made around $10k. We discussed putting $1k in a ROTH, $1k in checking(also get a debit card), and the remaining $8k into VTSAX. Trying to decide if we should put the VTSAX in a Vanguard account under my name or his. Only advantage I know of to have the account under my name would be for college financial aid eligibility. We already have a vanguard account under my name with VTSAX we've been saving for him and plan to give him when he's college age.

Any thoughts on whose name the Vanguard VTSAX shares should go under, his or ours?? I'd prefer for it to be under his name so he can open the account, purchase the shares, and in the future contribute when he'd like from his checking account.

It's his money, it should go in his name.

Although since he's 15, it will have to be a custodial account.  At Vanguard, this would almost certainly be labeled as a UTMA account, which is just a standard legal framework for custodial accounts.

You can serve as custodian, and he can have your name removed and convert it to a full Vanguard taxable account when he reaches the age of majority in your state of residence, which will almost certainly be 21.

Agree with the above poster that putting $6K into a Roth is what I would do.  Although when I started custodial Roths for my teenagers, Schwab was much more accommodating than Vanguard for small, new, custodial accounts.  So all my kids have Schwab Roths in SWTSX.

[FIRE@50]

If I open a Roth IRA in my child's name to invest her babysitting money, will I have to file a tax return for her?

[Michael in ABQ]

If I open a Roth IRA in my child's name to invest her babysitting money, will I have to file a tax return for her?

No, as long as there's nothing withheld to get back by filing a tax return, she should be well under the threshold which is about $12,000.

Or you can spend an estimated 12 minutes to fill out the tool on the IRS website. https://www.irs.gov/help/ita/do-i-need-to-file-a-tax-return

This is why we made sure to mark our kids as exempt from withholding when we pay them via our payroll service from our business.

[SEAK]

Looking at a Roth IRA for our 15 year old. He spent the summer working as a deckhand on a gill-netter and made around $10k. We discussed putting $1k in a ROTH, $1k in checking(also get a debit card), and the remaining $8k into VTSAX. Trying to decide if we should put the VTSAX in a Vanguard account under my name or his. Only advantage I know of to have the account under my name would be for college financial aid eligibility. We already have a vanguard account under my name with VTSAX we've been saving for him and plan to give him when he's college age.

Any thoughts on whose name the Vanguard VTSAX shares should go under, his or ours?? I'd prefer for it to be under his name so he can open the account, purchase the shares, and in the future contribute when he'd like from his checking account.

It's his money, it should go in his name.

Although since he's 15, it will have to be a custodial account.  At Vanguard, this would almost certainly be labeled as a UTMA account, which is just a standard legal framework for custodial accounts.

You can serve as custodian, and he can have your name removed and convert it to a full Vanguard taxable account when he reaches the age of majority in your state of residence, which will almost certainly be 21.

Agree with the above poster that putting $6K into a Roth is what I would do.  Although when I started custodial Roths for my teenagers, Schwab was much more accommodating than Vanguard for small, new, custodial accounts.  So all my kids have Schwab Roths in SWTSX.

All of this sounds great, thanks for the info. Curious as to why you think he should he max out the Roth vs putting the majority into a taxable account though? I know he's looking to invest his money for use sometime after college or trade school; maybe buy himself a boat (we live on the ocean in Southeast AK), down payment on a house, etc. Hard to convince a 15 year old he should be saving his money in an account that can't be used until he's 59.5 years old. Thought it was a decent compromise to at least put some money in a Roth.

Another thing I need to think about is that he'll probably have to pay taxes this year. As he'll also going to be getting an Alaska Permanent Fun Dividend check of roughly $3,200 that we also plan to invest. So he'll have income over $13,000 for the year.

[zolotiyeruki]

All of this sounds great, thanks for the info. Curious as to why you think he should he max out the Roth vs putting the majority into a taxable account though? I know he's looking to invest his money for use sometime after college or trade school; maybe buy himself a boat (we live on the ocean in Southeast AK), down payment on a house, etc. Hard to convince a 15 year old he should be saving his money in an account that can't be used until he's 59.5 years old. Thought it was a decent compromise to at least put some money in a Roth.

Another thing I need to think about is that he'll probably have to pay taxes this year. As he'll also going to be getting an Alaska Permanent Fun Dividend check of roughly $3,200 that we also plan to invest. So he'll have income over $13,000 for the year.

I can answer this one!  Roth contributions can be withdrawn at any time with no penalty.  It's the *gains* that cannot be withdrawn penalty-free.  When the kid needs the money for college or trade school or whatever, they can withdraw that $6k.

[MDM]

Hard to convince a 15 year old he should be saving his money in an account that can't be used until he's 59.5 years old.

True, but worth a try. ;)

Better than being 55 and realizing, "hmm, I'd better start saving...".

[secondcor521]

If I open a Roth IRA in my child's name to invest her babysitting money, will I have to file a tax return for her?

No, as long as there's nothing withheld to get back by filing a tax return, she should be well under the threshold which is about $12,000.

Or you can spend an estimated 12 minutes to fill out the tool on the IRS website. https://www.irs.gov/help/ita/do-i-need-to-file-a-tax-return

This is why we made sure to mark our kids as exempt from withholding when we pay them via our payroll service from our business.

For dependents, whether or not to file has different rules.

See Charts B and C in the IRS instructions for "Who must file?"

In particular, for dependents, they do not get the $12K standard deduction; their standard deduction is a calculated amount that is based on their earned and unearned income.

Also, for self-employed individuals (which a babysitter typically would be), they may have to file in order to pay their self-employment taxes.  This would generally happen if their net income from self-employment exceeds $600, although depending on whether they babysat for family or others might come into play.

[MDM]

Also, for self-employed individuals (which a babysitter typically would be), they may have to file in order to pay their self-employment taxes.  This would generally happen if their net income from self-employment exceeds $600....

Good point.  The self-employment (SE) tax kicks in a little lower: above $432 (=$399/0.9235) in net Schedule C income.  See lines 2, 4a, and 4c of Schedule SE.

[secondcor521]

Also, for self-employed individuals (which a babysitter typically would be), they may have to file in order to pay their self-employment taxes.  This would generally happen if their net income from self-employment exceeds $600....

Good point.  The self-employment (SE) tax kicks in a little lower: above $432 (=$399/0.9235) in net Schedule C income.  See lines 2, 4a, and 4c of Schedule SE.

Thanks for the correction :)

[Michael in ABQ]

If I open a Roth IRA in my child's name to invest her babysitting money, will I have to file a tax return for her?

No, as long as there's nothing withheld to get back by filing a tax return, she should be well under the threshold which is about $12,000.

Or you can spend an estimated 12 minutes to fill out the tool on the IRS website. https://www.irs.gov/help/ita/do-i-need-to-file-a-tax-return

This is why we made sure to mark our kids as exempt from withholding when we pay them via our payroll service from our business.

For dependents, whether or not to file has different rules.

See Charts B and C in the IRS instructions for "Who must file?"

In particular, for dependents, they do not get the $12K standard deduction; their standard deduction is a calculated amount that is based on their earned and unearned income.

Also, for self-employed individuals (which a babysitter typically would be), they may have to file in order to pay their self-employment taxes.  This would generally happen if their net income from self-employment exceeds $600, although depending on whether they babysat for family or others might come into play.

Thanks, didn't realize that. I just ran through the 30-40 questions as one of my kids and it popped out this answer.

"You are not required to file a tax return because your income does not equal or exceed $1,350, nor do you owe any special taxes or have any special situations that require you to file."

This is based on W-2 income as a dependent with no income tax withheld (though they are learning the joy of payroll taxes).

[secondcor521]

If I open a Roth IRA in my child's name to invest her babysitting money, will I have to file a tax return for her?

No, as long as there's nothing withheld to get back by filing a tax return, she should be well under the threshold which is about $12,000.

Or you can spend an estimated 12 minutes to fill out the tool on the IRS website. https://www.irs.gov/help/ita/do-i-need-to-file-a-tax-return

This is why we made sure to mark our kids as exempt from withholding when we pay them via our payroll service from our business.

For dependents, whether or not to file has different rules.

See Charts B and C in the IRS instructions for "Who must file?"

In particular, for dependents, they do not get the $12K standard deduction; their standard deduction is a calculated amount that is based on their earned and unearned income.

Also, for self-employed individuals (which a babysitter typically would be), they may have to file in order to pay their self-employment taxes.  This would generally happen if their net income from self-employment exceeds $600, although depending on whether they babysat for family or others might come into play.

Thanks, didn't realize that. I just ran through the 30-40 questions as one of my kids and it popped out this answer.

"You are not required to file a tax return because your income does not equal or exceed $1,350, nor do you owe any special taxes or have any special situations that require you to file."

This is based on W-2 income as a dependent with no income tax withheld (though they are learning the joy of payroll taxes).

It would be unusual for a babysitter to be a W-2.  (?)

[Michael in ABQ]

It would be unusual for a babysitter to be a W-2.  (?)

My kids are W-2 employees for our business. That's the example I was using when I went through the IRS questionnaire. Otherwise, there would be potential issues like the Nanny Tax or Self Employment Taxes.

[secondcor521]

It would be unusual for a babysitter to be a W-2.  (?)

My kids are W-2 employees for our business. That's the example I was using when I went through the IRS questionnaire. Otherwise, there would be potential issues like the Nanny Tax or Self Employment Taxes.

Right.  There are two different posters on this sub-thread - you, with W-2 kids, and FIRE@50, with a babysitting kid.  I did not notice that originally.

[FIRE@50]

Thanks everyone for the replies. This is interesting and helpful.

So, it looks like my daughter would potentially owe self employment taxes for her babysitting but if she put 100% of her income into a Roth IRA, she would be back to zero income for a tax basis, right? So, even in the unlikely event that her gross income exceeds the limits mentioned, there would still be no taxes due. But again, would she be required to file a tax return to show that income and IRA deposit?

[secondcor521]

Thanks everyone for the replies. This is interesting and helpful.

So, it looks like my daughter would potentially owe self employment taxes for her babysitting but if she put 100% of her income into a Roth IRA, she would be back to zero income for a tax basis, right?

No.  Contributions to Roth IRAs do not affect income taxes in the year of the contribution because they are not deductible from income.

So, even in the unlikely event that her gross income exceeds the limits mentioned, there would still be no taxes due.

No.  Self employment taxes would still be due even if no income taxes were due.

But again, would she be required to file a tax return to show that income and IRA deposit?

She isn't required to file to show income.

She isn't required to file to show an IRA contribution (unless it's a non-deductible traditional IRA contribution, in which case filing Form 8606 is required at least).

She is required to file if she meets any of the conditions in Charts B or C in the "Who must file?" section of the instructions for Form 1040.

She is required to file if her net earnings from self employment exceeds the limit mentioned, because that is a condition in Chart C which requires the filing of a tax return.  The reason to require filing in this scenario is to calculate and pay the self employment taxes due on her income.

[SEAK]

Looking at a Roth IRA for our 15 year old. He spent the summer working as a deckhand on a gill-netter and made around $10k. We discussed putting $1k in a ROTH, $1k in checking(also get a debit card), and the remaining $8k into VTSAX. Trying to decide if we should put the VTSAX in a Vanguard account under my name or his. Only advantage I know of to have the account under my name would be for college financial aid eligibility. We already have a vanguard account under my name with VTSAX we've been saving for him and plan to give him when he's college age.

Any thoughts on whose name the Vanguard VTSAX shares should go under, his or ours?? I'd prefer for it to be under his name so he can open the account, purchase the shares, and in the future contribute when he'd like from his checking account.

It's his money, it should go in his name.

Although since he's 15, it will have to be a custodial account.  At Vanguard, this would almost certainly be labeled as a UTMA account, which is just a standard legal framework for custodial accounts.

You can serve as custodian, and he can have your name removed and convert it to a full Vanguard taxable account when he reaches the age of majority in your state of residence, which will almost certainly be 21.

Agree with the above poster that putting $6K into a Roth is what I would do.  Although when I started custodial Roths for my teenagers, Schwab was much more accommodating than Vanguard for small, new, custodial accounts.  So all my kids have Schwab Roths in SWTSX.

OK, so thanks to all of the advice I opened Vanguard Custodial UTMA and ROTH accounts for my 15 year old. Got him to agree to seed his ROTH w/ $1k and he decided the rest of his summer earnings ($9K) from deck-handing on a gillnetter would be invested into VTSAX in his UTMA. Couldn't quite convince him that his 59-1/2 year old self would have appreciated $6k in his ROTH vs $1k. But oh well, it's a start!

[EchoStache]

Looking at a Roth IRA for our 15 year old. He spent the summer working as a deckhand on a gill-netter and made around $10k. We discussed putting $1k in a ROTH, $1k in checking(also get a debit card), and the remaining $8k into VTSAX. Trying to decide if we should put the VTSAX in a Vanguard account under my name or his. Only advantage I know of to have the account under my name would be for college financial aid eligibility. We already have a vanguard account under my name with VTSAX we've been saving for him and plan to give him when he's college age.

Any thoughts on whose name the Vanguard VTSAX shares should go under, his or ours?? I'd prefer for it to be under his name so he can open the account, purchase the shares, and in the future contribute when he'd like from his checking account.

It's his money, it should go in his name.

Although since he's 15, it will have to be a custodial account.  At Vanguard, this would almost certainly be labeled as a UTMA account, which is just a standard legal framework for custodial accounts.

You can serve as custodian, and he can have your name removed and convert it to a full Vanguard taxable account when he reaches the age of majority in your state of residence, which will almost certainly be 21.

Agree with the above poster that putting $6K into a Roth is what I would do.  Although when I started custodial Roths for my teenagers, Schwab was much more accommodating than Vanguard for small, new, custodial accounts.  So all my kids have Schwab Roths in SWTSX.

OK, so thanks to all of the advice I opened Vanguard Custodial UTMA and ROTH accounts for my 15 year old. Got him to agree to seed his ROTH w/ $1k and he decided the rest of his summer earnings ($9K) from deck-handing on a gillnetter would be invested into VTSAX in his UTMA. Couldn't quite convince him that his 59-1/2 year old self would have appreciated $6k in his ROTH vs $1k. But oh well, it's a start!

It seems like you may have missed the response earlier regarding why you/he may want to consider maxing out the Roth.  Contributions can be withdrawn anytime without penalty.  The massive up side is that, due to his young age, all growth and contributions will never be taxed again if he doesn't spend/withdraw some or all of it.  So there is basically no downside at all, just a potentially enormous upside.

[zolotiyeruki]

Looking at a Roth IRA for our 15 year old. He spent the summer working as a deckhand on a gill-netter and made around $10k. We discussed putting $1k in a ROTH, $1k in checking(also get a debit card), and the remaining $8k into VTSAX. Trying to decide if we should put the VTSAX in a Vanguard account under my name or his. Only advantage I know of to have the account under my name would be for college financial aid eligibility. We already have a vanguard account under my name with VTSAX we've been saving for him and plan to give him when he's college age.

Any thoughts on whose name the Vanguard VTSAX shares should go under, his or ours?? I'd prefer for it to be under his name so he can open the account, purchase the shares, and in the future contribute when he'd like from his checking account.

It's his money, it should go in his name.

Although since he's 15, it will have to be a custodial account.  At Vanguard, this would almost certainly be labeled as a UTMA account, which is just a standard legal framework for custodial accounts.

You can serve as custodian, and he can have your name removed and convert it to a full Vanguard taxable account when he reaches the age of majority in your state of residence, which will almost certainly be 21.

Agree with the above poster that putting $6K into a Roth is what I would do.  Although when I started custodial Roths for my teenagers, Schwab was much more accommodating than Vanguard for small, new, custodial accounts.  So all my kids have Schwab Roths in SWTSX.

OK, so thanks to all of the advice I opened Vanguard Custodial UTMA and ROTH accounts for my 15 year old. Got him to agree to seed his ROTH w/ $1k and he decided the rest of his summer earnings ($9K) from deck-handing on a gillnetter would be invested into VTSAX in his UTMA. Couldn't quite convince him that his 59-1/2 year old self would have appreciated $6k in his ROTH vs $1k. But oh well, it's a start!

It seems like you may have missed the response earlier regarding why you/he may want to consider maxing out the Roth.  Contributions can be withdrawn anytime without penalty.  The massive up side is that, due to his young age, all growth and contributions will never be taxed again if he doesn't spend/withdraw some or all of it.  So there is basically no downside at all, just a potentially enormous upside.

Plus, since teenagers are unlikely to be paying much income taxes due to their low income, they'll likely end up paying zero taxes on any of that money, ever.

[SEAK]

Nope, I get it. Hard to convince a teenager the logic and benefits of a ROTH though...He's contributing to a ROTH about 10 years sooner than I did though, so that's a win in my book!

Looking at a Roth IRA for our 15 year old. He spent the summer working as a deckhand on a gill-netter and made around $10k. We discussed putting $1k in a ROTH, $1k in checking(also get a debit card), and the remaining $8k into VTSAX. Trying to decide if we should put the VTSAX in a Vanguard account under my name or his. Only advantage I know of to have the account under my name would be for college financial aid eligibility. We already have a vanguard account under my name with VTSAX we've been saving for him and plan to give him when he's college age.

Any thoughts on whose name the Vanguard VTSAX shares should go under, his or ours?? I'd prefer for it to be under his name so he can open the account, purchase the shares, and in the future contribute when he'd like from his checking account.

It's his money, it should go in his name.

Although since he's 15, it will have to be a custodial account.  At Vanguard, this would almost certainly be labeled as a UTMA account, which is just a standard legal framework for custodial accounts.

You can serve as custodian, and he can have your name removed and convert it to a full Vanguard taxable account when he reaches the age of majority in your state of residence, which will almost certainly be 21.

Agree with the above poster that putting $6K into a Roth is what I would do.  Although when I started custodial Roths for my teenagers, Schwab was much more accommodating than Vanguard for small, new, custodial accounts.  So all my kids have Schwab Roths in SWTSX.

OK, so thanks to all of the advice I opened Vanguard Custodial UTMA and ROTH accounts for my 15 year old. Got him to agree to seed his ROTH w/ $1k and he decided the rest of his summer earnings ($9K) from deck-handing on a gillnetter would be invested into VTSAX in his UTMA. Couldn't quite convince him that his 59-1/2 year old self would have appreciated $6k in his ROTH vs $1k. But oh well, it's a start!

It seems like you may have missed the response earlier regarding why you/he may want to consider maxing out the Roth.  Contributions can be withdrawn anytime without penalty.  The massive up side is that, due to his young age, all growth and contributions will never be taxed again if he doesn't spend/withdraw some or all of it.  So there is basically no downside at all, just a potentially enormous upside.

Plus, since teenagers are unlikely to be paying much income taxes due to their low income, they'll likely end up paying zero taxes on any of that money, ever.