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Hi Fools,

A relative gave our 1-year-old daughter a big check for Christmas, with the wish that we open a ROTH IRA for her... It's my understanding that to contribute to a ROTH IRA she must have "earned income". While that can preety much be explained away by "posing for pictures" or some other such nonsense as far as the IRS is concerned, I'm frustrated by the fact that since the check was for more than $400 my daughter would be technically obliged to pay self-employment tax on her "earnings".

I'm wondering if all this extra paperwork is really worth it for a 1-year old who won't see this money for 60 years (except for the educational-use exception). There's a limit to how much hassle I will go through just to legally avoid taxes... although this money *could* grow very fast unencumbered by taxes.

What do other FOOLs think?
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Greetings, Priced, and welcome. You wrote:

<<A relative gave our 1-year-old daughter a big check for Christmas, with the wish that we open a ROTH IRA for her... It's my understanding that to contribute to a ROTH IRA she must have "earned income". While that can preety much be explained away by "posing for pictures" or some other such nonsense as far as the IRS is concerned, I'm frustrated by the fact that since the check was for more than $400 my daughter would be technically obliged to pay self-employment tax on her "earnings".

I'm wondering if all this extra paperwork is really worth it for a 1-year old who won't see this money for 60 years (except for the educational-use exception). There's a limit to how much hassle I will go through just to legally avoid taxes... although this money *could* grow very fast unencumbered by taxes.

What do other FOOLs think?>>


I think it's not the smartest thing in the world to try and mess with the IRS. A gift is not earned compensation. I think it's very foolish (small "f" intended) to try and fudge the rules. Additionally, an IRS examiner may even decide it's a form of tax fraud. Do you really want that kind of grief?

Regards....Pixy
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Pixy,

What about an Educational IRA in the parents name?


GP
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GP asks:

<<What about an Educational IRA in the parents name?>>

That's fine because it's only the parent's earned income that counts. The drawback, though, is the contribution is limited to $500 per year from all sources for the child. For the one-year-old in this instance, contributions can be made for only 17 years. Compounding at 12%, that would be $27,375 towards the first year of school. At 7% inflation in college costs, that won't be enough to cover that first year. Still, it's a start.

Regards...Pixy
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>> is the contribution is limited to $500 per year from all sources for the child. <<

Ouch. Is that so ?

I thought it was $500 per year per contributor , and anybody could contribute.

No wonder so few brokers are willing to set these up easily.

Oh well.

- DD
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DD writes:

>> is the contribution is limited to $500 per year from all sources for the child. <<

Ouch. Is that so ?

I thought it was $500 per year per contributor , and anybody could contribute.

No wonder so few brokers are willing to set these up easily.


It's $500 per child maximum from all sources. And, yes, that's why so few vendors are eager to accept EIRAs. The administrative costs make them uneconomical.

Regards….Pixy
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Well in 60 years, $400 turns into $360,000 at a 12% return !!!!!

Is it worth the 'hassle' ????
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