Custodial Roth IRA

Submitted by David Mitchell on Mon, 2022-11-14 20:36

If a parent wants to open a custodial Roth IRA for their child and pay their child $6000 to do work around the house and the child is willing to fund the custodial Roth IRA, will the child have to file a tax return and pay payroll taxes?



Submitted by William Tuttle on Tue, 2022-11-15 00:55

  • Payments for children doing ordinary household chores are not compensation.
  • No compensation, no eligibility for IRA contributions.
  • There is a possible gray area for teenagers.
  • Some and I only mean some CPAs take an aggressive approach when the family has already demonstrated they have paid third parties for such tasks.
  • E.g. The family has routinely hired third parties for such tasks as babysitting, lawn mowing, etc…
  • Then it may be possible to hire teenagers as household help for such tasks. Even then you must pay them fair market value (FMV) wages for the actual work tasks and hours completed.
  • You most definitely can’t just make up some wages that match the IRA contribution limit.

Personally, I would just wait until they are teenagers and get legitimate employment. 

  • P.S. If you have a business and have appropriate business necessary tasks commensurate with their age, knowledge, skills and experience. That is a far more defensible avenue for them to earn compensation eligible for IRA contributions.

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