ROTH for 5 & 6 year olds

Submitted by Mobey on Wed, 2018-08-08 20:03

Client has rentals and wants to hire their kids (5&6 years old) to do chores and then put the money into Roth IRAs for them.

Thoughts?

Would payroll taxes and a W-2 be required?



Submitted by William Tuttle on Wed, 2018-08-08 22:16

  • Paying your children for chores is not earned income.
  • You can pay family members and deduct a Fair Mark Value (FMV) wage for productive work for a business that you would hire someone else to do.
  • I would find it hard to justify that for any 5 or 6 year old. This would clearly just be make work for the sole purpose of making Roth contributions.
  • If the pay is justified. FICA deductions for children < 18 of a Self-employed business with only parent(s) as owners is not required. The same is true for unemployment insurance for children < 21.
  • If you file a W-4 for the child claiming exemption from withholding. No income tax withholding or tax return would be required. However, a W-2 would be required for wages >= $600/year.

Submitted by Alan - IRA critic on Thu, 2018-08-09 00:43

Perhaps 3 or 4 years from now might make sense. Tax courts have approved a deduction on the parent’s business return for wages representing reasonable value for actual work performed, but have not directly dealt with the IRA contribution.  Note that upon majority when the child becomes a young adult they can withdraw the Roth balance at will.

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