Message Font: Serif | Sans-Serif
No. of Recommendations: 0
Can anyone tell me if it is possible to open IRAs for grandchildren so long as the children earn more than $2,000 per year?

Yes. Anyone under 70 1/2 with $2,000 in taxable compensation can contribute $2,000 to some sort of IRA.

Can their employment be payment for duties around the family home (washing dishes, taking the garbage out, cutting the lawn, washing the car, etc.) or does the employment have to be by non-family members?

This is acceptible earned income. Make sure it's reasonable for the work performed.

Is there a minimum age to start an IRA for children?

Not in tax law. There is some difficulty in finding a custodian who will deal with a minor, but they are out there.

In otherwords, can I employ them for such things and then deposit $2,000 in their IRA accounts?

Technically, no. You can pay them for work they perform. It's then their money to do with as they please. Of course if they blow their first week's wages on Twinkies (my breaking-into-the-bank trip down memory lane) instead of showing you the receipt for the IRA contribution, you don't have to hire them the next week.

Can an IRA be also a custodial account?

In the sense you mean, I don't think so. An IRA is a custodial account, but the custodian is the IRA provider, e.g. the broker, and the beneficial interest in this case is held by the child. I don't think you can add an intermediary as you could in a UTMA account. You can find out for sure by contacting the chosen IRA custodian.

I assume their parents would have to file an income tax statement for them.

No, they would have to file their own, if they met the filing requirement. However, a dependent child with only earned income of less than roughly $4,000 doesn't have to file a return.

Would they also have to pay Social Security tax on their income?

Not as long as they're under 18. For such children domestic employment is exempt from SS, Medicare, and Federal Unemployment taxes.

The reason I want to do this is to take advantage of the compounding that will occur over 40-50 years and to pass on some of my estate to them legally and without taxes.

We were doing fine until we got to the second clause here. Do not try to disguise gifts as wages. However, as long as you're paying them for work performed, it's a great idea.

Phil Marti
Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.