Backdoor Roth for kids?
Okay forum…. I have a question. A client today asked me if he can do a backdoor Roth for his kids, one of whom is 12-years old and (of course) doesn’t have a job, so no earned income (the other is 20 and in college so does have some earned income from summer work). This seems like a no-brainer and yet it seems like there is something wrong with this idea. On the other hand, if Peter Thiel can load up his Roth with a billion dollars worth of “worthless” stock at the time of funding, then what could be so wrong with a backdoor Roth for a child? Can this be done legally?
Thanks in advance for comments and help with this question.
Permalink Submitted by William Tuttle on Thu, 2021-08-26 12:34
You are talking about basic Roth IRAs. A Backdoor Roth is only required when the individual’s Roth MAGI exceeds the income limit.
An individual can only contribute up to the lessor of their IRA compensation and the IRA contribution limit. No IRA compensation no IRA contributions.
See “What Is Compensation?” in IRS publication 590-A. In this case it would be most likely W-2 wages.
No Roth IRA contributions for the 12 year old and the 20 year old would likely be limited to their W-2 Box 1.
Also, the parent wouldn’t be “doing” a Roth IRA for the 20 year old. As an adult, they would have to open it themselves. Although, parents can make contributions as long as total contributions are <= the lessor or their IRA compensation and the IRA contribution limit.
The only way for the 12 year old to contribute to a Roth IRA would be to have legitimate IRA compensation.
Envy is one of the seven deadly sins. For me, more power to Peter Thiel to have the foresight to buy his founders stock in a Roth IRA.
I received founder’s stock in three separate startups not unlike Peter Thiel. Unfortunately, I didn’t place mine in a self-directed IRA. Not that it would have mattered. The first one went bankrupt, the second one where I received 2% of the company netted me $312.87. The last one is limping along and the jury is still out.
I don’t begrudge one penny of the billionaires’ fortunes, they were just smarter and/or luckier.
Permalink Submitted by Alan Myers on Thu, 2021-08-26 16:26
The client in question does have a MAGI that well exceeds the Roth limitations. He has an IRA and is fully funding his 401k so we don’t do a backdoor Roth for him but we do make backdoor Roth contributions for his wife who did not have an IRA. Given that we are able to do that for his wife (who is not employed), he wondered about using that same technique for his kids. That is, make an after-tax contribution to an IRA for his kids – custodial IRA for the minor, of course – and then a conversion to a Roth (again, custodial Roth for the minor).OOOH! Wait… while the wife has no earned income, she can do this based on spousal income. The spousal income would not cover either of the kids (especially the older one since she has reached the age of majority in their home state). They could open a custodial Roth for the youngest, pay her for doing chores around the house and fund the Roth with that income. Am I thinking about this correctly? As an aside, I was being a tad sarcastic in my Peter Thiel comment. I don’t begrudge him the bonanza in his Roth though I do think it will invite a lot of scrutiny and possibly / probably some regulation, whether needed or not.
Permalink Submitted by Alan - IRA critic on Thu, 2021-08-26 17:34
As you noted, spousal contributions cannot apply to IRA contributions for anyone but the spouse when filing jointly. As for family chores, technically they do not qualify notwithstanding the IRS’ record of minimal regulations and oversight of these contributions. The following link explains in more detail:
Roth IRAs for Minors – Fairmark.com