Custodial ROTH IRA
Can a grandparent set up a custodial ROTH IRA for their 5 year old grandchild? The grandchild has no earned income. A brokerage firm has set one up in the grandchild name with the grandfather as custodian, the grandfather contributed the money. I believe this is wrong but I cannot find anything in writing to prove it to the brokerage firm.
Permalink Submitted by Alan - IRA critic on Sat, 2017-03-25 19:30
Yes, anyone can open a custodial IRA for a minor, but some IRA custodians may not offer these or may have other restrictions. The minor MUST HAVE earned income at a rate reflecting the work performed. A gift or allowance is not acceptable as earned income. If an excess contribution is made, there is no statute of limitations and a 6% excise tax applies for each year the excess remains. Perhaps this custodian does not want to enter the debate over what constitutes legitimate earned income, and while the IRS Regulations clearly require “taxable compensation” for IRA contributions, paying a child for household chores is often considered earned income by the custodian of the minor’s account, these payments are not really taxable because the child does not report the income and the parent/GP does not issue a W-2. In addition, unless the minor lives with the grandparent, they have no idea what the child has actually done to generate taxable comp without a W-2. Between the IRA custodian, the responsible party for the minor who opens the account and signs on as the minor’s custodian, and the child’s parent if different, there are plenty of gray areas, but the IRS rarely actively looks into them.