I've had the thought to start an IRA for or daughter for awhile now, but the income requirement is a big roadblock for a 3 year old. Could an extended family member with a legitimate photography business hire her as a model and 1099 her?

What is the value in this idea vs investing in a 529 plan that she'd be able to access much earlier?

My guess is that he might not want this money to be touched until 65 so it has much longer to grow and the individual will also be more likely to use the windfall in a very smart way.

It can be used to pay off a mortgage, payoff OP's grandkids' college, etc.

As a dad of 3 kids under 4, I'm very interested to hear responses from people who do this stuff for a living.

Open a custodial brokerage account. No earned income needed, tax free gifts from you get invested into the account, and the child gains control once they reach Age of Majority defined by the state of residence (for Texas, that's 18 years old)

I have three children (grown and on their own now) and have always owned my own businesses and my children were paid wages, starting around the age of 6 or so. Not a great deal of money, and early on, not even enough to fully fund an IRA. As they got older, then the wages were enough to fully fund an IRA (the funds for which mostly came from me). Still funded college savings, but the idea was all then additional years for compounding that would be the case in the IRAs.

Squirrel Master said:

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What is the value in this idea vs investing in a 529 plan that she'd be able to access much earlier?

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Longer time horizon for growth. Especially a good deal with a Roth because it's an extra 15-20 years of untaxed growth on basically tax free money. Even if she took out loans for college and was paying them off, she'd have a sizable IRA already working for her instead of starting from scratch. What's better, an IRA earning money for 55 years and making loan payments for 10-20 or making 401k/IRA contributions for 35 years?

A 529 will grow, but it's meant to be depleted in 20 years and used specifically for education. With the IRA, there's no strings attached except for age. With a Roth, the tax advantage makes more sense because the taxes now would be minimal but the gain would be astronomically more.

Also, a 529 is meant to be used at a very specific time, so you're banking on the market being good at or slightly before a specific time. What happens if there's a recession when she's a junior or senior in HS? She could certainly take out loans and pay them off with the 529, but then you're losing out on interest to essentially float education expenses for a better time to withdraw from the 529. With an IRA, the timing of dispersals is over a much longer timeframe (age 60+) so the need for the market to be at a decent spot at a specific time is much less. She would have a better opportunity to choose a local maximum in the market to move to a conservative portfolio.

The maturity aspect of it also plays a small part. By retirement age, she'd better have a handle on finances than as a college student. I'd also rather she know she has to work for college (and scholarships) but have a decent landing spot for retirement than possibly have her screw around for 4-5 years because the money is free and then have to save when she got out.

The TLDR is that a Roth would offer better tax advantages over the long run and the IRA carries less risk due to its longer time horizon in both growth and intended dispersal period.

ehrmantraut said:

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Open a custodial brokerage account. No earned income needed, tax free gifts from you get invested into the account, and the child gains control once they reach Age of Majority defined by the state of residence (for Texas, that's 18 years old)

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I could do this, but I'd much rather have the tax advantage of the Roth because all of the growth would be tax free. However, I could have her withdraw from the account and contribute to a Roth on her own when she's older. It's an idea.

ABATTBQ11 said:

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ehrmantraut said:

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Open a custodial brokerage account. No earned income needed, tax free gifts from you get invested into the account, and the child gains control once they reach Age of Majority defined by the state of residence (for Texas, that's 18 years old)

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I could do this, but I'd much rather have the tax advantage of the Roth because all of the growth would be tax free. However, I could have her withdraw from the account and contribute to a Roth on her own when she's older. It's an idea.

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If you did this, would she just have to pay tax on the amount going into the Roth? Or maybe just pay tax on the gains each year?

I believe pay taxes on any gains experienced at withdrawal. At that point, it's taxed income and goes into the Roth as such. That's how I understand it.

There are really no options for tax free growth for a 3 yr old. You can pump it into your Roth IRA and she can be the beneficiary once you kick the bucket, which would likely be before she retired.

ehrmantraut said:

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There are really no options for tax free growth for a 3 yr old. You can pump it into your Roth IRA and she can be the beneficiary once you kick the bucket, which would likely be before she retired.

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Aren't dividends and interest on children's accounts tax exempt up to a threshold of $2,200? You can have about $100K in an S&P 500 index fund before hitting that at 2% dividend yield.

https://www.irs.gov/taxtopics/tc553

I agree that a custodial account would be my choice. It has fewer moving parts, negligible difference in taxes in the near run, and gives more options for using the funds as a young adult. Educate the kid to use money wisely and then let them live their life.

We opened a custodial IRA for our 5 year old son about a year ago. He's had 3 paying jobs (2 commercials and 1 photo shoot). Made about $3500 through all that. I thought it'd be a great idea to start sticking some of that into a long term savings vehicle.

We've also got a 529 for him - for whatever reason I just can't fully commit to the 529. Maybe it's just being skeptical of how laws might change or how education will change in the next 10 years. We still put a little bit in there regularly, but it won't be a fully funded account when he's ~18. Wife and I also believe in the idea of working to put yourself through college.

After his last commercial I also opened an UTMA custodial brokerage account. Something for his "savings" that he could access for non-education when he's just starting out. Maybe a first car type of thing. I just got tired of looking at his savings account and realized that would be a lot of years without any real growth potential.

This is what I'm looking for. How did he get paid? 1099? How did you file his taxes? 1040EZ? Did you get any scrutiny our inquiries from the IRS?

ABATTBQ11 said:

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This is what I'm looking for. How did he get paid? 1099? How did you file his taxes? 1040EZ? Did you get any scrutiny our inquiries from the IRS?

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1040EZ is no longer available. As all of you look into this, do some looking into the "kiddie tax" as it applies to taxable accounts.

His agency just writes him a check and they give him an earnings statement at the year end. We actually still have to submit his 1040 for taxes. I don't believe they deduct any taxes so he'll owe.