Is it possible to open and fund a Roth IRA for my kid

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investmax
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Is it possible to open and fund a Roth IRA for my kid

Post by investmax »

Hi friends,

My kid is 7 years old and obviously not working and has no income. Can I open a Roth IRA account for him now and fund it annually so that he has a headstart with his investments? The investments will be made by me till he has some income when he grows older. Also he will take control of this account once he becomes 18 or 21.

Is this allowed and feasible? Or is IRA not allowed for kids, but only for spouses.
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retired@50
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Re: Is it possible to open and fund a Roth IRA for my kid

Post by retired@50 »

investmax wrote: Sat Apr 10, 2021 2:29 pm Hi friends,

My kid is 7 years old and obviously not working and has no income. Can I open a Roth IRA account for him now and fund it annually so that he has a headstart with his investments? The investments will be made by me till he has some income when he grows older. Also he will take control of this account once he becomes 18 or 21.

Is this allowed and feasible? Or is IRA not allowed for kids, but only for spouses.
The kid isn't eligible without earned income.

The spouse is, because of the working spouse's earned income.

Regards,
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sidartvader
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Re: Is it possible to open and fund a Roth IRA for my kid

Post by sidartvader »

My understanding is that the kid needs to have some earned income in order to have a Roth IRA. So if your kid has some job (commensurate for a 7 year old), then you can start a Roth IRA
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retiredjg
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Re: Is it possible to open and fund a Roth IRA for my kid

Post by retiredjg »

Some kids actually earn income. The most common example is child model or actor for the very young ones. Maybe lawnmowing, babysitting, or dog walking for the older ones. I doubt that mowing the family yard or babysitting the younger sibling or walking the family dog will do.

I think some people may think that an allowance in exchange for some chores qualifies, but I'd be surprised if the IRS would consider that compensation or earned income.
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investmax
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Re: Is it possible to open and fund a Roth IRA for my kid

Post by investmax »

retired@50 wrote: Sat Apr 10, 2021 2:31 pm
The kid isn't eligible without earned income.

The spouse is, because of the working spouse's earned income.

Regards,
Thank you. This makes sense. One hypothetical question about earned income though. What about people who have no "income" but live off inheritance or something like that. Can they have a Roth IRA and invest in that? Like trust fund kids we keep hearing about :-D
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retiredjg
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Re: Is it possible to open and fund a Roth IRA for my kid

Post by retiredjg »

investmax wrote: Sat Apr 10, 2021 2:48 pm Thank you. This makes sense. One hypothetical question about earned income though. What about people who have no "income" but live off inheritance or something like that. Can they have a Roth IRA and invest in that? Like trust fund kids we keep hearing about :-D
They can "have" a Roth IRA, but cannot contribute based on investment income. It has to be income from work.
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investmax
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Re: Is it possible to open and fund a Roth IRA for my kid

Post by investmax »

retiredjg wrote: Sat Apr 10, 2021 2:44 pm Some kids actually earn income. The most common example is child model or actor for the very young ones. Maybe lawnmowing, babysitting, or dog walking for the older ones. I doubt that mowing the family yard or babysitting the younger sibling or walking the family dog will do.

I think some people may think that an allowance in exchange for some chores qualifies, but I'd be surprised if the IRS would consider that compensation or earned income.
Thanks, this makes sense. Hypothetically lets say a few years down the line my kid finds a small part time job like in a store or something and he makes small amounts of money. Does he need to contribute to this IRA from his own earned money. My point is if the kid makes some money he will surely spend it all and then some. In that case can I fund his Roth IRA up to his 'earned income' from his job, even though he spent his earnings on stuff he wants.
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retiredjg
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Re: Is it possible to open and fund a Roth IRA for my kid

Post by retiredjg »

investmax wrote: Sat Apr 10, 2021 2:54 pm Thanks, this makes sense. Hypothetically lets say a few years down the line my kid finds a small part time job like in a store or something and he makes small amounts of money. Does he need to contribute to this IRA from his own earned money. My point is if the kid makes some money he will surely spend it all and then some. In that case can I fund his Roth IRA up to his 'earned income' from his job, even though he spent his earnings on stuff he wants.
My understanding is that he can spend his and you can contribute for him. However, I'm unclear on what the limit is....whether it is total salary or salary after payroll taxes (medicare, FICA, SS).
sycamore
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Re: Is it possible to open and fund a Roth IRA for my kid

Post by sycamore »

retiredjg wrote: Sat Apr 10, 2021 2:58 pm
investmax wrote: Sat Apr 10, 2021 2:54 pm Thanks, this makes sense. Hypothetically lets say a few years down the line my kid finds a small part time job like in a store or something and he makes small amounts of money. Does he need to contribute to this IRA from his own earned money. My point is if the kid makes some money he will surely spend it all and then some. In that case can I fund his Roth IRA up to his 'earned income' from his job, even though he spent his earnings on stuff he wants.
My understanding is that he can spend his and you can contribute for him. However, I'm unclear on what the limit is....whether it is total salary or salary after payroll taxes (medicare, FICA, SS).
+1. Many parents do this sort of thing to encourage the kid to at least learn about saving, accounts, etc. The actual money used to fund the Roth account does not have to literally come from the kid's earned money. "Money is fungible" applies here.

https://www.irs.gov/retirement-plans/pl ... ion-limits says the limit is "taxable compensation". That's compensation before taxes are taken out.
Me-in-Oz
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Re: Is it possible to open and fund a Roth IRA for my kid

Post by Me-in-Oz »

This is a great article that answers that question. Essentially your child must have income, and an allowance doesn’t count. But if he completes chores, like mowing the lawn, particularly if he does it for neighbors in addition to your lawn, I believe that counts. Just keep good records. Some parents “match” earnings and put the money into the Roth. Gifts can also go into the account.

https://www.investopedia.com/articles/p ... -child.asp
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Re: Is it possible to open and fund a Roth IRA for my kid

Post by retired@50 »

retiredjg wrote: Sat Apr 10, 2021 2:51 pm
investmax wrote: Sat Apr 10, 2021 2:48 pm Thank you. This makes sense. One hypothetical question about earned income though. What about people who have no "income" but live off inheritance or something like that. Can they have a Roth IRA and invest in that? Like trust fund kids we keep hearing about :-D
They can "have" a Roth IRA, but cannot contribute based on investment income. It has to be income from work.
The only way I know of to "grow" a Roth IRA without earned income is by using a traditional IRA to Roth IRA conversion. Conversions are still allowed, even when contributions are not, but you need to have some assets in a traditional IRA to begin with.

Some early retirees use this method to increase the value of Roth holdings.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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Re: Is it possible to open and fund a Roth IRA for my kid

Post by cchrissyy »

When your kid gets their first real job, yes, you can open a roth IRA for them and put in the money by transfer from your own funds. The contribution limit is presently set at $6k or their earned income that year, whichever is less.

until that happens, you can feel free to start saving and investing in their name and take advantage of early years compounding. it just won't be a roth ira. the account type is a UTMA brokerage account. good luck!
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tadamsmar
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Re: Is it possible to open and fund a Roth IRA for my kid

Post by tadamsmar »

If the kid has some income from compensation, then he can probably double dip up to the Roth IRA limit.

He can have a solo Roth 401k and a Roth IRA. And he can put his total income in both. And thereby half of the total investment would not need to be income.
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Re: Is it possible to open and fund a Roth IRA for my kid

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investmax wrote: Sat Apr 10, 2021 2:48 pm One hypothetical question about earned income though. What about people who have no "income" but live off inheritance or something like that. Can they have a Roth IRA and invest in that? Like trust fund kids we keep hearing about :-D
No like in my case when I retired I get a monthly pension check but it's not considered earned income for iras which is one reason why I worked one month into the year so I could do a last roth contribution and put my profit sharing bonus into the 401k.
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Re: Is it possible to open and fund a Roth IRA for my kid

Post by livesoft »

One can always give money to their child even if they cannot have a Roth IRA. A so-called taxable account for young person invested tax-efficiently is pretty much like a Roth IRA anyways. These accounts are UTMA or UGMA accounts which the OP can look up. Parents can contribute (give!) the child LOTS more money than the low Roth IRA limit, too. The child can use the money to help fund their Roth IRA when they become able to contribute to a Roth IRA.

Furthermore, parents can just mentally "give" or "earmark" money in their own accounts for their childrens' future Roth IRA.

Basically, folks who are so keen on starting a Roth IRA for children are kind of missing all the easy and legal stuff that they can do which is just as good and maybe even better.
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investmax
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Re: Is it possible to open and fund a Roth IRA for my kid

Post by investmax »

Thank you friends for all the great ideas and insight. This has given me plenty of things to research over the next few days. Thanks to each one of you for your kind advise.
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Re: Is it possible to open and fund a Roth IRA for my kid

Post by aristotelian »

retiredjg wrote: Sat Apr 10, 2021 2:44 pm Some kids actually earn income. The most common example is child model or actor for the very young ones. Maybe lawnmowing, babysitting, or dog walking for the older ones. I doubt that mowing the family yard or babysitting the younger sibling or walking the family dog will do.

I think some people may think that an allowance in exchange for some chores qualifies, but I'd be surprised if the IRS would consider that compensation or earned income.
I don't think that's actually common... Chores are definitely not earned income.
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Re: Is it possible to open and fund a Roth IRA for my kid

Post by drumboy256 »

investmax wrote: Sat Apr 10, 2021 2:29 pm Hi friends,

My kid is 7 years old and obviously not working and has no income. Can I open a Roth IRA account for him now and fund it annually so that he has a headstart with his investments? The investments will be made by me till he has some income when he grows older. Also he will take control of this account once he becomes 18 or 21.

Is this allowed and feasible? Or is IRA not allowed for kids, but only for spouses.
You want a UTMA account, not a Roth.
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