Opening Roth IRA for 17yo Daughter

Submitted by Thomas Broznowicz on Mon, 2016-01-04 14:36

My 17yo daughter got her 1st part time job right before Christmas. She hopes to keep this job throughout 2016 as she finishes high school and begins college. She is looking to open a Roth IRA (today) and deposit $5500 that she has in her savings account (move it from savings into Roth IRA). My question are: 1) Can she do this even though she has no earned income for 2016 (yet)? 2) If yes, then what happen if she does not earn $5500 throughout 2016? Say she only earns $4000.



Submitted by Alan - IRA critic on Mon, 2016-01-04 19:04

She can open and fund the Roth IRA now with projected income, but if the earned income does not materialize by the end of 2016, she will have an excess regular Roth contribution and the excess will have to be removed from the Roth IRA. If her earned income is 4000, then she would have a 1500 excess contribution to remove along with allocated earnings on that 1500.

Submitted by Thomas Broznowicz on Mon, 2016-01-04 22:26

Thanks Alan. You helped me before on here. Just so that I understand. Let’s say she doubles her money (wishful thinking but just to use easy numbers). $5500 becomes $11000. She only earns $4000. She has to take out (by April 15, 2017?)  $1500 excess plus $1500 earnings. But, (because it’s a Roth) there will not be a 10% penalty for the $1500 earnings? or will there be a penalty?

Submitted by Alan - IRA critic on Tue, 2016-01-05 01:14

  • She until the extended due date to make a corrective distribution (10/15/2017) if she files her return or extends it by 4/15. Your math is correct. With a 1500 excess contribution and 100% gain, she would have to take out 1500 of earnings, which would be subject to both tax and 10% penalty.
  • Of course, in this exact situation it would be better to leave the excess in and pay the 6% penalty on 1500, then remove the excess amount of 1500 after 10/15. All the gains then get to remain in the Roth. She would end up with no tax or penalty other than the 6% which would be $90. Obviously, this option is only beneficial when Roth gains are upwards of 25% or so.

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