Can I make a Roth for my daughter?

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Shalom Aleichem
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Can I make a Roth for my daughter?

Post by Shalom Aleichem »

Hi everyone.
My daughter is G-d willing off to college soon. She has a job at a local shop. She is planning on working at my practice for a bit over the summer to make some money as my employee. Obviously money is fungible (a). Obviously (I think to the people here) you can only fund a Roth with earned income, not gifts (b). Therefore, if between her shop job and her job with me, if she earns a total of 6K this year (through wages), there is no reason I can't just open a Roth and fund it for 6K, correct? Meaning - I think anyone can fund a Roth for up to the maximum allowed, but only as much as earned in wages, correct? Meaning - if she earns 2K this year, she could potentially fund as much as 2K for a Roth, but it doesn't have to be from the dollars that went through her W2, money being fungible, correct?

It's late for me and I'm not totally coherent I know.
desiderium
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Re: Can I make a Roth for my daughter?

Post by desiderium »

I did this with my kids from their first teenage job until their early 20's. I gave them the full amount of any W2 earnings up to the contribution limit for their Roth. At first they treated this as the tiresome prattling of an old guy, but it worked, and they are attentive to this ritual on their own.
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TomatoTomahto
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Re: Can I make a Roth for my daughter?

Post by TomatoTomahto »

desiderium wrote: Thu Apr 15, 2021 5:11 am I did this with my kids from their first teenage job until their early 20's. I gave them the full amount of any W2 earnings up to the contribution limit for their Roth. At first they treated this as the tiresome prattling of an old guy, but it worked, and they are attentive to this ritual on their own.
Ditto. I usually refer to it as a bribe, but in polite company I call it matching :D

It worked.
I get the FI part but not the RE part of FIRE.
delamer
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Re: Can I make a Roth for my daughter?

Post by delamer »

Yes, you can fund your child’s Roth with your money and she can keep her earnings.

And yes, you can’t contribute more than the gross on her W-2(s).
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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BolderBoy
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Re: Can I make a Roth for my daughter?

Post by BolderBoy »

delamer wrote: Thu Apr 15, 2021 9:44 am Yes, you can fund your child’s Roth with your money and she can keep her earnings.

And yes, you can’t contribute more than the gross on her W-2(s).
Agreed. These are the answers to your questions.
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dink2win
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Re: Can I make a Roth for my daughter?

Post by dink2win »

Yes, I do this for my wife. I also call it "matching"
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tfb
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Re: Can I make a Roth for my daughter?

Post by tfb »

Shalom Aleichem wrote: Thu Apr 15, 2021 1:53 am there is no reason I can't just open a Roth and fund it for 6K, correct?
If she's an adult, she'll have to open the account in her name. You can't open the account using her information. If she's still a minor, you have to open a special custodial Roth IRA.
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Fat Tails
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Re: Can I make a Roth for my daughter?

Post by Fat Tails »

tfb wrote: Thu Apr 15, 2021 12:11 pm
Shalom Aleichem wrote: Thu Apr 15, 2021 1:53 am there is no reason I can't just open a Roth and fund it for 6K, correct?
If she's an adult, she'll have to open the account in her name. You can't open the account using her information. If she's still a minor, you have to open a special custodial Roth IRA.
+1, once the account is open you can deposit your money directly into it using EFT, wire, or old fashioned check. Max contribution for 2021 is $6,000 or up to her W2 income, whichever is LESS. Don’t over contribute. Have her fully invest in VTI or VTSAX.

If she had W2 earnings in 2020, you have until 17 May 2021 to make a contribution for 2020.

This worked well with our kids. It got them used to watching an investment grow while keeping their hands off it.

Cheers
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AllMostThere
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Re: Can I make a Roth for my daughter?

Post by AllMostThere »

IMHO, there is no better financial way to kickstart children into adulthood. While they may not appreciate in younger years, they will learn to review and take control of the Roth IRA as they mature. This is what I have done. With their limited earnings, I funded Roth IRa for DS (High School 15 year old) and DD (College Freshman). For DS I contribute directly via personal check, but for DD I transfer funds into her checking account which she then transfers into her Roth IRA. She then makes the investment herself into ITOT. No better way to establish the learning cycle and life long legacy. :sharebeer
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oldfatguy
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Re: Can I make a Roth for my daughter?

Post by oldfatguy »

Shalom Aleichem wrote: Thu Apr 15, 2021 1:53 am Therefore, if between her shop job and her job with me, if she earns a total of 6K this year (through wages), there is no reason I can't just open a Roth and fund it for 6K, correct?
Just make sure that her work for you is legit - real work at a reasonable wage.
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F150HD
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Re: Can I make a Roth for my daughter?

Post by F150HD »

Fat Tails wrote: Fri Apr 16, 2021 1:27 am +1, once the account is open you can deposit your money directly into it using EFT, wire, or old fashioned check.
this would show the $$ coming from someone other than her (??)
oldfatguy
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Re: Can I make a Roth for my daughter?

Post by oldfatguy »

F150HD wrote: Fri Apr 16, 2021 6:54 am
Fat Tails wrote: Fri Apr 16, 2021 1:27 am +1, once the account is open you can deposit your money directly into it using EFT, wire, or old fashioned check.
this would show the $$ coming from someone other than her (??)
Doesn't matter where the money comes from. It's a gift to the daughter and she can fund her IRA up to the limit or amount of her earnings.
delamer
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Re: Can I make a Roth for my daughter?

Post by delamer »

oldfatguy wrote: Fri Apr 16, 2021 7:33 am
F150HD wrote: Fri Apr 16, 2021 6:54 am
Fat Tails wrote: Fri Apr 16, 2021 1:27 am +1, once the account is open you can deposit your money directly into it using EFT, wire, or old fashioned check.
this would show the $$ coming from someone other than her (??)
Doesn't matter where the money comes from. It's a gift to the daughter and she can fund her IRA up to the limit or amount of her earnings.
Right. I’ve done this multiple years (funding Vanguard Roth’s) and it is a non-issue. There was never even a request to provide proof of income.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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gatorking
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Re: Can I make a Roth for my daughter?

Post by gatorking »

delamer wrote: Thu Apr 15, 2021 9:44 am Yes, you can fund your child’s Roth with your money and she can keep her earnings.

And yes, you can’t contribute more than the gross on her W-2(s).
I think tip income that doesn't show up on W2 also counts towards the max.
delamer
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Re: Can I make a Roth for my daughter?

Post by delamer »

gatorking wrote: Fri Apr 16, 2021 10:12 am
delamer wrote: Thu Apr 15, 2021 9:44 am Yes, you can fund your child’s Roth with your money and she can keep her earnings.

And yes, you can’t contribute more than the gross on her W-2(s).
I think tip income that doesn't show up on W2 also counts towards the max.
Makes sense. But you’d better be paying taxes on those tips if you want to count them.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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Watty
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Re: Can I make a Roth for my daughter?

Post by Watty »

A couple of points;

1) I am not sure of the details of the current rules but having the money in her name could reduce any college financial aid that the might qualify for.

2) It might seem obvious but make sure that she knows about and understands the account. People have posted about situations where a parent opened an account in their name years before that they did not know about and that can cause all sorts of problems. Even if she signs a piece of paper you put in front of her she really needs to understand what is going on with the account.

3) If she eventually has a job with the college when she goes off to college you need to check to make sure that actually qualifies for the Roth contribution. The problem is that some college "jobs" may actually be some sort of stipend or grant that may not count as wages.

4) Unless you are really well off and could retire today then you may want to consider if it might be too soon to be transfering money to your kid. The problem is that you could be laid off or disabled tomorrow and there could be a bear market and your finances could turn out a lot worse than you are expecting. By far one of the best financial things that you can do for a kid is to make sure that they do not need to support you someday. I know people that have had to do that and it can be hard. You could put that $6,000 into a taxable in your name and she could inherit it some day and under the current tax laws she would get it at a stepped up cost basis. That is almost as good as money in a Roth.
neverpanic
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Re: Can I make a Roth for my daughter?

Post by neverpanic »

Watty wrote: Fri Apr 16, 2021 10:25 am 3) If she eventually has a job with the college when she goes off to college you need to check to make sure that actually qualifies for the Roth contribution. The problem is that some college "jobs" may actually be some sort of stipend or grant that may not count as wages.
Depending on the type of aid, "work-study" jobs often will not count as earned income. So, if that were the case, she can't use those earnings to make an IRA contribution, but she is not taxed on the money either.
Fat Tails wrote: Fri Apr 16, 2021 1:27 am Have her fully invest in VTI or VTSAX.
Put a portion in VTI/VTSAX, but if she has interest, let her select some other funds or individual stocks she might like.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
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Shalom Aleichem
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Re: Can I make a Roth for my daughter?

Post by Shalom Aleichem »

neverpanic wrote: Fri Apr 16, 2021 11:50 am
Watty wrote: Fri Apr 16, 2021 10:25 am 3) If she eventually has a job with the college when she goes off to college you need to check to make sure that actually qualifies for the Roth contribution. The problem is that some college "jobs" may actually be some sort of stipend or grant that may not count as wages.
Depending on the type of aid, "work-study" jobs often will not count as earned income. So, if that were the case, she can't use those earnings to make an IRA contribution, but she is not taxed on the money either.
Fat Tails wrote: Fri Apr 16, 2021 1:27 am Have her fully invest in VTI or VTSAX.
Put a portion in VTI/VTSAX, but if she has interest, let her select some other funds or individual stocks she might like.
I was thinking 1/4 BTC, 1/4 Ethereum, 1/4 Gamestop, and 1/4 Tesla. Is that too conservative? No margins or futures there.
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gwe67
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Re: Can I make a Roth for my daughter?

Post by gwe67 »

Shalom Aleichem wrote: Fri Apr 16, 2021 3:24 pm
neverpanic wrote: Fri Apr 16, 2021 11:50 am
Watty wrote: Fri Apr 16, 2021 10:25 am 3) If she eventually has a job with the college when she goes off to college you need to check to make sure that actually qualifies for the Roth contribution. The problem is that some college "jobs" may actually be some sort of stipend or grant that may not count as wages.
Depending on the type of aid, "work-study" jobs often will not count as earned income. So, if that were the case, she can't use those earnings to make an IRA contribution, but she is not taxed on the money either.
Fat Tails wrote: Fri Apr 16, 2021 1:27 am Have her fully invest in VTI or VTSAX.
Put a portion in VTI/VTSAX, but if she has interest, let her select some other funds or individual stocks she might like.
I was thinking 1/4 BTC, 1/4 Ethereum, 1/4 Gamestop, and 1/4 Tesla. Is that too conservative? No margins or futures there.
Are you serious? Do you want to teach her investing or gambling?
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Topic Author
Shalom Aleichem
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Re: Can I make a Roth for my daughter?

Post by Shalom Aleichem »

gwe67 wrote: Fri Apr 16, 2021 3:41 pm
Shalom Aleichem wrote: Fri Apr 16, 2021 3:24 pm
neverpanic wrote: Fri Apr 16, 2021 11:50 am
Watty wrote: Fri Apr 16, 2021 10:25 am 3) If she eventually has a job with the college when she goes off to college you need to check to make sure that actually qualifies for the Roth contribution. The problem is that some college "jobs" may actually be some sort of stipend or grant that may not count as wages.
Depending on the type of aid, "work-study" jobs often will not count as earned income. So, if that were the case, she can't use those earnings to make an IRA contribution, but she is not taxed on the money either.
Fat Tails wrote: Fri Apr 16, 2021 1:27 am Have her fully invest in VTI or VTSAX.
Put a portion in VTI/VTSAX, but if she has interest, let her select some other funds or individual stocks she might like.
I was thinking 1/4 BTC, 1/4 Ethereum, 1/4 Gamestop, and 1/4 Tesla. Is that too conservative? No margins or futures there.
Are you serious? Do you want to teach her investing or gambling?
Haha! Of course not! I haven't funded it yet. 90% of my portfolio is pretty traditional. About 90% VTSAX/VOO and similar, and 10% bond fund. The other 10% is in Hedgefundie. I am debating - as she will not need the money for a long time hopefully - either to do a full Hedgefundie play or VTSAX/QQQ split, or some combination of the two.

I feel foolish but I bought a tiny bit of BTC a couple weeks ago. Foolish because it's up 20% or more in a couple of weeks, and I think if I really believed in it (I don't believe enough) either do it or don't do it. But putting a couple bucks into it is kind of silly. It does however keep me looking at the price nearly every day!
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dratkinson
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Re: Can I make a Roth for my daughter?

Post by dratkinson »

dink2win wrote: Thu Apr 15, 2021 12:04 pm Yes, I do this for my wife. I also call it "matching"
Believe IRS calls it a "spousal IRA".
Search: https://www.google.com/search?q=spousal+ira
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MN-Investor
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Re: Can I make a Roth for my daughter?

Post by MN-Investor »

I'm doing this for several nieces.

Two additional suggestions: 1) Give her a copy of Mike Piper's Investing Made Simple, and 2) Make a specific suggestion of how she should invest that money, such as 90% Fidelity Total Market Index Fund (FSKAX) and 10% Fidelity U.S. Bond Index Fund (FXNAX). Or whatever. Otherwise initial investing can be too overwhelming for a first time investor.
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TropikThunder
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Re: Can I make a Roth for my daughter?

Post by TropikThunder »

dink2win wrote: Thu Apr 15, 2021 12:04 pm Yes, I do this for my wife. I also call it "matching"
Not the same thing. Spouses can make IRA contributions even without any earned income of their own. Kids can't.
DIFAR31
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Re: Can I make a Roth for my daughter?

Post by DIFAR31 »

Watty wrote: Fri Apr 16, 2021 10:25 am
1) I am not sure of the details of the current rules but having the money in her name could reduce any college financial aid that the might qualify for.
Assets in qualified retirement accounts (this includes Roth IRAs) held by either the student or parents will be disregarded when college financial aid is calculated.
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Re: Can I make a Roth for my daughter?

Post by brian91480 »

delamer wrote: Thu Apr 15, 2021 9:44 am Yes, you can fund your child’s Roth with your money and she can keep her earnings.

And yes, you can’t contribute more than the gross on her W-2(s).
So if she earns $6,000 gross... and pays $1,000 in state, federal, & fica taxes... and she nets $5,000 after taxes are paid... you can still have the full $6,000 put into a Roth account?
DIFAR31
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Re: Can I make a Roth for my daughter?

Post by DIFAR31 »

brian91480 wrote: Fri Apr 16, 2021 11:02 pm
delamer wrote: Thu Apr 15, 2021 9:44 am Yes, you can fund your child’s Roth with your money and she can keep her earnings.

And yes, you can’t contribute more than the gross on her W-2(s).
So if she earns $6,000 gross... and pays $1,000 in state, federal, & fica taxes... and she nets $5,000 after taxes are paid... you can still have the full $6,000 put into a Roth account?
Yes... the limit is $6,000 or taxable compensation, whichever is less.
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F150HD
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Re: Can I make a Roth for my daughter?

Post by F150HD »

oldfatguy wrote: Fri Apr 16, 2021 7:33 am
F150HD wrote: Fri Apr 16, 2021 6:54 am
Fat Tails wrote: Fri Apr 16, 2021 1:27 am +1, once the account is open you can deposit your money directly into it using EFT, wire, or old fashioned check.
this would show the $$ coming from someone other than her (??)
Doesn't matter where the money comes from. It's a gift to the daughter and she can fund her IRA up to the limit or amount of her earnings.
um, of course it doesn't matter where the money comes from (??), but doing it in the manner described directly translates backwards to someone else making the contribution for her & leaves a clear paper trail of such.
TropikThunder
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Re: Can I make a Roth for my daughter?

Post by TropikThunder »

F150HD wrote: Sat Apr 17, 2021 9:43 pm
oldfatguy wrote: Fri Apr 16, 2021 7:33 am
F150HD wrote: Fri Apr 16, 2021 6:54 am
Fat Tails wrote: Fri Apr 16, 2021 1:27 am +1, once the account is open you can deposit your money directly into it using EFT, wire, or old fashioned check.
this would show the $$ coming from someone other than her (??)
Doesn't matter where the money comes from. It's a gift to the daughter and she can fund her IRA up to the limit or amount of her earnings.
um, of course it doesn't matter where the money comes from (??), but doing it in the manner described directly translates backwards to someone else making the contribution for her & leaves a clear paper trail of such.
Is that a problem?
oldfatguy
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Re: Can I make a Roth for my daughter?

Post by oldfatguy »

F150HD wrote: Sat Apr 17, 2021 9:43 pm
oldfatguy wrote: Fri Apr 16, 2021 7:33 am
F150HD wrote: Fri Apr 16, 2021 6:54 am
Fat Tails wrote: Fri Apr 16, 2021 1:27 am +1, once the account is open you can deposit your money directly into it using EFT, wire, or old fashioned check.
this would show the $$ coming from someone other than her (??)
Doesn't matter where the money comes from. It's a gift to the daughter and she can fund her IRA up to the limit or amount of her earnings.
um, of course it doesn't matter where the money comes from (??), but doing it in the manner described directly translates backwards to someone else making the contribution for her & leaves a clear paper trail of such.
Right. What is your concern about that?
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TomatoTomahto
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Re: Can I make a Roth for my daughter?

Post by TomatoTomahto »

oldfatguy wrote: Sun Apr 18, 2021 5:35 am
F150HD wrote: Sat Apr 17, 2021 9:43 pm
oldfatguy wrote: Fri Apr 16, 2021 7:33 am
F150HD wrote: Fri Apr 16, 2021 6:54 am
Fat Tails wrote: Fri Apr 16, 2021 1:27 am +1, once the account is open you can deposit your money directly into it using EFT, wire, or old fashioned check.
this would show the $$ coming from someone other than her (??)
Doesn't matter where the money comes from. It's a gift to the daughter and she can fund her IRA up to the limit or amount of her earnings.
um, of course it doesn't matter where the money comes from (??), but doing it in the manner described directly translates backwards to someone else making the contribution for her & leaves a clear paper trail of such.
Right. What is your concern about that?
I’ve never let it concern me, but the word “individual” is all over the code and even the title. I can’t imagine the IRS being bothered by it. But, imagine divorced and uncommunicative parents each making the max contribution for a child in the same year; I imagine the IRS would rule that neither was legit rather than playing King Solomon.
I get the FI part but not the RE part of FIRE.
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Re: Can I make a Roth for my daughter?

Post by TropikThunder »

TomatoTomahto wrote: Sun Apr 18, 2021 5:48 am I’ve never let it concern me, but the word “individual” is all over the code and even the title. I can’t imagine the IRS being bothered by it. But, imagine divorced and uncommunicative parents each making the max contribution for a child in the same year; I imagine the IRS would rule that neither was legit rather than playing King Solomon.
I think it's more likely that whoever made the contribution first would "win". There would be nothing wrong with the first contribution so the IRS would have no grounds to disallow it.
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Re: Can I make a Roth for my daughter?

Post by neverpanic »

TropikThunder wrote: Sun Apr 18, 2021 6:08 am
TomatoTomahto wrote: Sun Apr 18, 2021 5:48 am I’ve never let it concern me, but the word “individual” is all over the code and even the title. I can’t imagine the IRS being bothered by it. But, imagine divorced and uncommunicative parents each making the max contribution for a child in the same year; I imagine the IRS would rule that neither was legit rather than playing King Solomon.
I think it's more likely that whoever made the contribution first would "win". There would be nothing wrong with the first contribution so the IRS would have no grounds to disallow it.
That is the correct assumption.

The excess contribution - not the source thereof - is the concern. The contribution limit is set by law. If the taxpayer has sufficient income to qualify for a maximum IRA contribution, the origin of the digital dollars is inconsequential. If there is an excess contribution, again, the source doesn't matter. The taxpayer is responsible to reconcile the overage, which may or may not involve paying a penalty.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
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