Roth IRA earned income requirements

Submitted by Karl Wolfman on Thu, 2018-06-14 03:20

Fairly new to this so if I state anything incorrectly by all means please let me know. My daughter will be 18 in Sept 2018 when she starts her senior year of high school.

For simplicity sakes say she’ll earn $2000 in calendar year 2018 (she works part time mainly at 1 job during the school year and has another part time job during the summer months only). I believe she could start a Roth IRA and input a max of $2000 say on 1/1/2019.

Is that correct or will the max have to be prorated and lowered for the year since she wasn’t 18 the entire year? Or can she start the Roth IRA right when she turns 18? If yes is she maxed out by the amount of earned income she has at that time?

Obviously she won’t take home $2000 and certainly won’t have saved $2000 so let’s assume she has saved only $500 when we get to 12/31/2018. Since I can gift tax free up to I think $14000 yearly. Could I then gift her the extra $1500 so she can invest the full $2000?

Is the earned income requirement necessary every year? For instance when she starts college next year (fall 2019) there’s certainly the chance that she may not work while she’s in college for 4 or more years. So my specific question is this…once a Roth IRA is started and owned by her can she still contribute to it each year if she’s not working (I.e. via gift money from me?). Or is earned income still required and that also sets the max that she can contribute and it’ll only earn interest on the balance already in there?



Submitted by Alan - IRA critic on Thu, 2018-06-14 17:02

  • She can make her Roth contribution for 2018 anytime in 2018 or up to 4/15/2019. However, if her earned income falls short of the amount contributed, she will then have an excess contribution to correct. Therefore, since there is uncertainty about the max contribution she will be allowed, she should probably wait until her W-2s are received in January, and then make her contribution clearly flagged as a 2018 contribution.  But there is no pro rating due to age and no requirement not to contribute before the income is actually earned.  But if she overshoots her earned income at the end of the year, she must remove the excess contribution.
  • Yes, she can make a contribution using gifted money, but still must have enough earned income for 2018.
  • She must have earned income every year to make new contributions and cannot use gifted money without the earned income. But the Roth will continue to generate earnings.
  • If she does any work for the college, she must receive a W-2 for the income to qualify. Fellowships and stipends do not count as earned income for IRA contribution purposes.

Submitted by tomd37 on Thu, 2018-06-14 18:55

Is it considered advisable for a child like this, who has earned income and contributing to a Roth IRA, to file a federal tax return to support the earned income, even if there might not be a tax refund to claim? 

Submitted by Alan - IRA critic on Thu, 2018-06-14 23:15

Tom, should not be necessary. The IRS will receive a copy of the W-2.

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