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I agree with the general thrust of Roy's comments, although I believe there's an exemption from employment taxes and reporting requirements where minor children are involved, as the original post indicated.

As I see it, the main problem in establishing IRAs for minor children whose only "income" is from doing household chores is the requirement that the income be taxable. You can't support an IRA contribution with nontaxable income. The amount you pay your daughter to mow the lawn isn't taxable income.

Interestingly, that's a proposition which virtually everyone instinctively understands to be true, but which is very difficult to prove. I doubt that anyone has ever reported such income on a tax return, even where the child had enough other income to be required to file. Yet there isn't any specific exemption for allowances and similar income, no rulings or cases. So far, the IRS hasn't been dumb enough to try to collect tax on this type of income, so the issue hasn't been raised. Yet if you ask someone at the IRS, they'll automatically say it's taxable because they're trained to say everything's taxable. (Remember the flap over gift tax on the return of McGuire's 62nd home run ball?)

Possibly people who set up IRAs on this basis will get away with it, but if the IRS ever wakes up and audits these IRAs, all of the contributions will be excess contributions generating penalties at the rate of 6% for every year they remain in the IRA, and all of the income generated by the IRA will be taxable.

For more on this subject, see http://www.fairmark.com/rothira/author.htm

Kaye Thomas, author
Fairmark Press Tax Guide for Investors
http://www.fairmark.com
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