GE said:

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www.fidelity.com/retirement-ira/roth-ira-kids

According to Fidelity, earned income for the child can come from a job or self-employment. The examples given are mowing lawns, babysitting, and shovelling snow. I'm not advocating lying to the IRS so don't just say they did these things and contribute for them, but if they do legitimate work of this nature there is no reason you can't contribute for them up to their qualifying earnings.

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If the only income from the business is from mom and dad, that could be a problem. If junior has 8 or 10 customers and is mowing those yards, that would work just fine. You also could run into problems if the parent is paying an unreasonably high amount to the child (so that the full IRA could be funded) relative to the others.

The kid would have to file a tax return and would owe self-employment tax. The amount used to determine Junior's IRA contribution is the net profit from the business, not the gross. Junior, if in Texas, would also have to file and pay sales tax on the work he does and if he owns any of his own equipment would have to render the personal property to the appraisal district.

All of this can work but it isn't quite as cut and dried as has been presented. It works much better when the parents, or an aunt or uncle, or some family member has a business and is willing to hire the kid.

investorAg83 said:

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GE said:

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www.fidelity.com/retirement-ira/roth-ira-kids

According to Fidelity, earned income for the child can come from a job or self-employment. The examples given are mowing lawns, babysitting, and shovelling snow. I'm not advocating lying to the IRS so don't just say they did these things and contribute for them, but if they do legitimate work of this nature there is no reason you can't contribute for them up to their qualifying earnings.

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I can't tell if you're getting it or not. Are they filing and paying taxes? If they aren't reporting income, the IRS is going to wonder where the income is coming from that they're setting aside until retirement.

If junior has a business (Billy's lawn mowing, inc.). Keeps record of income. Reports it as 1099 income. Then there is no problem...it's 'qualified income'

Getting 20 bucks cash for mowing a yard with no taxes paid on it is not 'qualified income'. Performing chores around the house is not 'qualified income'. It has to be reported. If everything is legitimate, it's fine.

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I believe there is a mechanism for parents to report their children's earnings as dependents on their return. Could be wrong though

GE said:

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investorAg83 said:

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GE said:

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www.fidelity.com/retirement-ira/roth-ira-kids

According to Fidelity, earned income for the child can come from a job or self-employment. The examples given are mowing lawns, babysitting, and shovelling snow. I'm not advocating lying to the IRS so don't just say they did these things and contribute for them, but if they do legitimate work of this nature there is no reason you can't contribute for them up to their qualifying earnings.

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I can't tell if you're getting it or not. Are they filing and paying taxes? If they aren't reporting income, the IRS is going to wonder where the income is coming from that they're setting aside until retirement.

If junior has a business (Billy's lawn mowing, inc.). Keeps record of income. Reports it as 1099 income. Then there is no problem...it's 'qualified income'

Getting 20 bucks cash for mowing a yard with no taxes paid on it is not 'qualified income'. Performing chores around the house is not 'qualified income'. It has to be reported. If everything is legitimate, it's fine.

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I believe there is a mechanism for parents to report their children's earnings as dependents on their return. Could be wrong though

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There is...that's where the threshold you mentioned earlier comes into play (if their income is less than 6300 they don't have to file separately). Their income still needs to be reported somewhere, though. And it needs to be taxable wages. Doesn't mean they have to pay tax on it (if it's below that figure they shouldn't owe anything), but it should be taxable. The part I think is throwing everyone off is the terms...'qualified income', 'earned income', 'taxable income' all mean very specific things when it comes to the IRS and taxes.

Think of it logistically...IRA's are either pretax or after tax, meaning that somewhere, the person who owns the IRA was supposed to pay the IRS based on their income; they just choose whether they want to pay it now or later. If Johnny is getting cash under the table and it isn't being reported ANYWHERE to the IRS, the IRS is going to wonder where the money came from that is going in the IRA because they never received taxes on it or have an amount being deferred. If it just came from the parents pocket to Johnny's, the parents paid taxes on it and it should go in the parent's IRA. But if it's legitimate wages for Johnny where it's now HIS income, that HE would owe taxes on (regardless of whether or not he falls in a bracket to owe anything), he can now put it in an IRA for later.

GE said:

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investorAg83 said:

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GE said:

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www.fidelity.com/retirement-ira/roth-ira-kids

According to Fidelity, earned income for the child can come from a job or self-employment. The examples given are mowing lawns, babysitting, and shovelling snow. I'm not advocating lying to the IRS so don't just say they did these things and contribute for them, but if they do legitimate work of this nature there is no reason you can't contribute for them up to their qualifying earnings.

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I can't tell if you're getting it or not. Are they filing and paying taxes? If they aren't reporting income, the IRS is going to wonder where the income is coming from that they're setting aside until retirement.

If junior has a business (Billy's lawn mowing, inc.). Keeps record of income. Reports it as 1099 income. Then there is no problem...it's 'qualified income'

Getting 20 bucks cash for mowing a yard with no taxes paid on it is not 'qualified income'. Performing chores around the house is not 'qualified income'. It has to be reported. If everything is legitimate, it's fine.

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I believe there is a mechanism for parents to report their children's earnings as dependents on their return. Could be wrong though

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The mechanism for parents to report their children's income applies only to unearned income (interest, dividends, capital gains, royalties, etc.) but not earned income (wages or self-employment income).

investorAg83 said:

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There is...that's where the threshold you mentioned earlier comes into play (if their income is less than 6300 they don't have to file separately). Their income still needs to be reported somewhere, though. And it needs to be taxable wages. Doesn't mean they have to pay tax on it (if it's below that figure they shouldn't owe anything), but it should be taxable. The part I think is throwing everyone off is the terms...'qualified income', 'earned income', 'taxable income' all mean very specific things when it comes to the IRS and taxes.

Think of it logistically...IRA's are either pretax or after tax, meaning that somewhere, the person who owns the IRA was supposed to pay the IRS based on their income; they just choose whether they want to pay it now or later. If Johnny is getting cash under the table and it isn't being reported ANYWHERE to the IRS, the IRS is going to wonder where the money came from that is going in the IRA because they never received taxes on it or have an amount being deferred. If it just came from the parents pocket to Johnny's, the parents paid taxes on it and it should go in the parent's IRA. But if it's legitimate wages for Johnny where it's now HIS income, that HE would owe taxes on (regardless of whether or not he falls in a bracket to owe anything), he can now put it in an IRA for later.

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If the child has $6,300 in wage income and that is his or her only income, the kid need not file a return (unless income tax has been withheld and they want it refunded). Doesn't matter if they want to fund an IRA or not, they have earned income and can fund an IRA (which should be a ROTH in this scenario). They would be below the filing threshold and there is no requirement to file a return just to get to fund an IRA. The IRS knows about the income since the W-2 has been filed with the Social Security Administration and the Social Security Administration has shared that with the IRS.

If it is self-employment income then the child will have to file a return and pay self-employment tax.

libertyag said:

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investorAg83 said:

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There is...that's where the threshold you mentioned earlier comes into play (if their income is less than 6300 they don't have to file separately). Their income still needs to be reported somewhere, though. And it needs to be taxable wages. Doesn't mean they have to pay tax on it (if it's below that figure they shouldn't owe anything), but it should be taxable. The part I think is throwing everyone off is the terms...'qualified income', 'earned income', 'taxable income' all mean very specific things when it comes to the IRS and taxes.

Think of it logistically...IRA's are either pretax or after tax, meaning that somewhere, the person who owns the IRA was supposed to pay the IRS based on their income; they just choose whether they want to pay it now or later. If Johnny is getting cash under the table and it isn't being reported ANYWHERE to the IRS, the IRS is going to wonder where the money came from that is going in the IRA because they never received taxes on it or have an amount being deferred. If it just came from the parents pocket to Johnny's, the parents paid taxes on it and it should go in the parent's IRA. But if it's legitimate wages for Johnny where it's now HIS income, that HE would owe taxes on (regardless of whether or not he falls in a bracket to owe anything), he can now put it in an IRA for later.

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If the child has $6,300 in wage income and that is his or her only income, the kid need not file a return (unless income tax has been withheld and they want it refunded). Doesn't matter if they want to fund an IRA or not, they have earned income and can fund an IRA (which should be a ROTH in this scenario). They would be below the filing threshold and there is no requirement to file a return just to get to fund an IRA. The IRS knows about the income since the W-2 has been filed with the Social Security Administration and the Social Security Administration has shared that with the IRS.

If it is self-employment income then the child will have to file a return and pay self-employment tax.

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Agreed. I don't know the in's and out's of filing, not filing, etc. That's what CPA's are for. But the bolded part is the most important part of what you posted with regards to funding an IRA. Doing stuff around the house for an allowance, mowing a neighbors yard for cash, etc. will not allow someone to put money in an IRA for their kid. And that's the part I'm trying to make sure everyone is aware of.

Stive said:

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Investorag hasn't been on this board in about 2 years and the misinformation on this thread was bad enough to draw him out of retirement swinging a big 'ol hammer.

Welcome back chief!

Threads like these are what I love pointing to when goofs on this forum say "all you need to do is read up on his stuff and you can do it all yourself."

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Haha...not trying to swing a hammer and not calling people goofs for trying to do this on their own. For the most part a lot of getting started isn't really that difficult. But be careful who you listen to and if you have a question, look it up yourself or ask a qualified person; not your neighbor or random people on a forum. Blind leading the blind...

I tend to stick to the boards I have stickied at the top of my favorites. Our voice isn't really welcomed here because we make a living giving advice so we are automatically met with skepticism.

It will if it constitutes a trade or business, even the IRS says so. To me, that would mean mowing yards for more than just parents. When I was a kid, a friend of mine and I were mowing 10 to 14 yards together and we each had 3 or 4 smaller ones to mow, from late spring to early fall. Some of them were $3 a week, lol. But that income would have qualified us to fund an IRA. If only mowing your parents yard, working around the house, etc. I would not suggest that they try to fund the IRA.

libertyag said:

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It will if it constitutes a trade or business, even the IRS says so. To me, that would mean mowing yards for more than just parents. When I was a kid, a friend of mine and I were mowing 10 to 14 yards together and we each had 3 or 4 smaller ones to mow, from late spring to early fall. Some of them were $3 a week, lol. But that income would have qualified us to fund an IRA. If only mowing your parents yard, working around the house, etc. I would not suggest that they try to fund the IRA.

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We're saying the same thing...it's either W2 and the employer is paying the tax (which I believe can be nothing if the income is small enough) or it's self employment and the child is paying the tax regardless of the amount of income earned. Self employment tax is imposed no matter the age, income, whether they're a dependent or not. But it has to be reported to the IRS in some form or fashion and taxes paid...either through w2 or self employment.

If anyone is trying to do this, talk to a CPA.

Nah, you weren't calling them goofs and I'm not calling anyone a good on this thread (these are common misperceptions and questions). Mine was just a general observation of a lot of others on different threads.

We used the Vanguard 529 Plan for both of our kids. We were happy with the results (we'll make our last withdrawal in January - whoop!). Good investment options and low costs. We also signed up for Upromise and linked it to the 529 plan. You effectively get cash back into the 529 based on purchases. It helped a little.

Save early and save often.

libertyag said:

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Seanzy2012 said:

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libertyag said:

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Stagecoach said:

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libertyag said:

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The new beneficiary can't be a random stranger though.

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Challenge

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Pardon?

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I'd have to check but I'm pretty sure you can add just about anybody as beneficiary to the 529.

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Where this was first mentioned, the poster indicated that if the child did not need or use the funds in the 529 it could be passed on to other family members or a random stranger. That cannot be done, only family members are qualified to be the new beneficiary.

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I could open a 529 plan for a friend of mines child. If the child didn't go to college, I could change the beneficiary to someone else in the CHILDs family but I am pretty sure you don't have to be a relative to open a 529 for someone whose not a relative.

Ok my mistake. We're talking about changing the beneficiary, not establishing it. Gotcha.

They can be set up for anyone by anyone (assuming you've got beneficiary information).

Straight from the horses mouth below.
https://www.irs.gov/newsroom/529-plans-questions-and-answers

Seanzy2012 said:

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Ok my mistake. We're talking about changing the beneficiary, not establishing it. Gotcha.

They can be set up for anyone by anyone (assuming you've got beneficiary information).

Straight from the horses mouth below.
https://www.irs.gov/newsroom/529-plans-questions-and-answers

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Exactly. The discussion was changing bene's.

Are you trying to say that if your kid starts his own lawn mowing company, they need to set it up as a company and report the earnings to fund the ROTH? I ask this because most kids just go door to door and get paid in cash every time they mow the lawn.

Thanks.

Aggiesincebirth said:

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Are you trying to say that if your kid starts his own lawn mowing company, they need to set it up as a company and report the earnings to fund the ROTH? I ask this because most kids just go door to door and get paid in cash every time they mow the lawn.

Thanks.

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Don't really have to set it up as a company but will have to file a tax return and will owe self-employment tax if the net earnings are just north of $400 for the year. Will also have to file sales tax reports.

And yes, quite a few get paid cash and don't report the income.