Conversion of a Minor’s IRA
An individual has three minor children that work as employees in his business. They have contributed to Traditional IRAs, but would like to convert their Traditionals to Roths going forward. Would the conversion end up subject to kiddie tax rules as unearned income? I haven’t been able to find anything on this given it’s probably a farely unique situation so any thought would be appreciated.
Permalink Submitted by Alan Spross on Fri, 2009-04-10 04:18
Yes, an IRA distribution which includes a Roth conversion is considered investment income of a child, and can therefore trigger the kiddie tax. Per Pub 17, p 211, investment income includes virtually everything other than earned income. Pension payments are mentioned along with the taxable portion of SS income and trust distributions. However, to the extent the child’s TIRA was made with non deductible contributions, the tax free portion of the conversion would not be counted. In many cases, the child has no need for the IRA deduction, and in certain cases, returns could be amended to eliminate the deduction and file an 8606 to report non deductible contributions.
You are right that this issue does not surface often, probably because most children’s regular contributions are made to a Roth IRA.