Custodial IRA for minors

Submitted by tunikipati on Tue, 2014-02-11 21:28

I want to open a custodial IRA for 2013 for my minor child. How can I fund this retirement account for my child? I see two options: 1) gift my child $5,500 for 2013 (no gift tax as amount is below annual limit of $14,000), and fund a custodial Roth IRA for my child with this amount; or 2) pay my child $5,500 for 2013 as a household employee, and use that amount to fund a custodial Roth IRA for my child. I beleive that my child does not have to file income tax return (below annual income limit). Any issues with the above approaches?



Submitted by Alan - IRA critic on Tue, 2014-02-11 22:01

Your child must have earned income. Types of earned income will depend on the age of the child. If child is of the age where household chores would be the only source of earned income, you can pay the child a reasonable wage (probably less than your state’s min hourly rate) and keep records of such work in case the IRA inquires.  The Roth contributions will not require that a return is filed for the child, but the wages might. An IRA contribution cannot be made on gift income, but to the extent the child spends some of the earned income you can replace that with a gift, but the Roth contribution cannot exceed the actual earned income.



Submitted by tunikipati on Wed, 2014-02-12 17:58

Thank you for the response. I have a few more questions1) In what form should I document of work of my child and corresponding compensation? How long should I keep these 2013 records?2) What are the implications on an my child’s 2013 Custodial Roth IRA, if in the future the IRA determines that the compensating my child was not valid or deemed not reasonable?3) What is the minimum age and maximum age for a child to earn a reasonable ware for household tasks?4) Is a parent liable to report such payments to his child in the his/her (parent’s) income tax filing?5) When a parent creates a custodial Roth IRA for his child and funds it using the child’s earned income, does this need to be reported to IRS in the parent’s income tax filing? Are there other forms the parent or the child need to file and keep for their records?



Submitted by Alan - IRA critic on Wed, 2014-02-12 20:33

  1. 1) No set format. It should show dates and hours worked and hourly rate or flat pay for the job. Could be on spreadsheet, anything that the IRS would understand. The IRS almost never asks about a minor’s IRA contribution, but best to be safe. Would keep them around 5 years after the last documentation year.
  2. In that case, the disallowed amounts would become excess contributions and subject to a 6% excise tax for each year they remained in the account, and any excess amounts would need to be distributed.  There is no statute of limitations on excess contributions.
  3. No set age limits. Under age 5 could be questionable.
  4. Not for a minor.
  5. No parent filing issues. Retain Form 5498 issued by the custodian in a Roth IRA file for the child. It is way of keeping track of the total regular Roth contributions made, which child will need to know if he ever takes a non qualified distribution. 
  6. Here is a helpful article that covers this situation: http://fairmark.com/retirement/roth-accounts/contributions-to-roth-accounts/roth-iras-for-minors/

 



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