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Today I went to meet with my tax person. I was told that I could reduce the amount of taxes I would pay by contributing to a SEP-IRA for myself, as well as contributing to an IRA for my son. I don't know where to start. Please help.
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. . . as well as contributing to an IRA for my son. I don't know where to start. . .


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Your son must have earned income for an IRA. If he does not have earned income he (or you) can not fund an IRA (Roth or Tradition).


sunray
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He has earned income. I pay him to do work for my real estate business.
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He has earned income. I pay him to do work for my real estate business.

Is he set up as an employee with records and everything, or is it more like paying him cash on the side?

Fuskie
Who wants to make sure it is earned income the IRS would recognize...
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Is he set up as an employee with records and everything, or is it more like paying him cash on the side?


I don't know about the OP's situation, but I wanted to point out that being paid in cash does not negate the fact that the earnings can be used to fund a Roth IRA. My kids both have Roth IRA's with earnings from pet-sitting, babysitting, and working for their father. For pet sitting and baby-sitting, I have them make a notation in their check register where the Roth contribution is coming from. When they work for their father, I pay them with a check so that I can roll up the amount. So far, they have not earned enough from DH to warrant writing them 1099's, but they will some day, and that is the mechanism I will use to report those earnings.

In the OP's case, since he mentioned a realtor's business, I would expect him to be paying his son with a check for a couple of reasons. One is that he wants the business to be able to deduct his son's wages as an expense, and it's just easier to do that if you've written a check because the records are all there.

Generally, people want to be paid in cash so that it's not easy to trace and theye don't want to report it to the IRS as income even though legally that money needs to be reported. But in cases like my kids, they simply get paid in cash because of the work they are doing where they're working for a neighbor doing some babysitting for $10, and most people don't write checks to the sitter.
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I'm in a similar position. My CPA recommends a Roth IRA since my son is in a low tax bracket and meets the income requirements. If you have a SEP-IRA for yourself, I believe you have to have a plan for employees over 21, but I assume your son is under 21, in which case it's optional. If he's under 18, I believe you'll have to open the IRA as a custodial account -- at least that's what I found at Fidelity and Vanguard. You can call one of their retirement specialists and have them walk you through the process.

In my case - I'm using this as an opportunity to get my son involved in the whole idea of investing. He has a regular savings account for his paycheck, but a Roth IRA is new to him -- and since we took forever to get involved in investing, we'd like to see him get started sooner.

Btw, I did the W-2 and all that...whatever my CPA suggested.

janlarc
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>> He has earned income. I pay him to do work for my real estate business. <<

You should be okay provided that you keep record of his hours worked and you pay him a wage that's reasonable for the work being done.

Make sure you keep these records; the IRS is suspicious of arrangements like this in many cases, but with proper documentation you should be fine.

#29
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He has earned income. I pay him to do work for my real estate business.

There is another question to ask your CPA. If this is a family owned business, your son may be able to avoid some tax with-holdings from his paycheck.

JLC



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T. Rowe Price will walk you through it. Very easy instructions for the SEP-IRA and IRA. Here is a link:

http://mutualfunds.troweprice.com/retFund.html?phone=4406

Don't panic, but get a move on, since you only have until April 15 to contribute for 2004.

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Wow! I'd heard that the Fool discussion boards were a great place to go to look for helpful advice for newbies to the investment process, but I had no idea I'd get such great help so quickly.

I went to the T. Rowe Price website, but it still confuses me. How do I choose which funds to use for the IRA? I need a SEP-IRA for myself, and it looks like a ROTH for my son. I also couldn't find where to look for what they charge to do the services. Aren't there places which charge very little?
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That's so awesome. My parents tought me nothing about investing and good money management so I look forward to the opportunity to teach my kids. I have a one year old daughter and my wife is pregnant now so it'll be a while before these issues come up but I love the idea of having Roth IRAs for kids to contribute to as they are making money.

Kudos to you!
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How old is you son ? Do you know what the age of majority is in your state for financial matters ?

My experience with custodial Roths is that it was hard to find a place that could do it(this may have changed). I'm also going through the process of getting myself removed as custodian for my now 21 yr old and was suprised to find out there is a process - I thought just writing a letter asking that it be done would be enough.

Look carefully at fees and account minimums wherever you check.

rad
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My experience with custodial Roths is that it was hard to find a place that could do it(this may have changed).

This is a good point. I have not had to deal with custodial accounts for the kids' Roths because they have so little in there that it wasn't possible for them to meet the brokerage minimums. They als deposit $10 or $20 every week or two, so what worked well for us was to let them open their Roth IRA's at the credit union where I do all my banking and where they have accounts. The credit union allowed the Roth IRA's to be just in the kids' names, so there are no custodial issues. In fact, DD just managed to reach the $1000 minimum in her account so that she could move the money from a savings account to a money market account. DS is not far behind, but he works less so it takes longer.

The plan has always been that we'd just start the Roth IRA's at the bank, and then once they had a few thousand dollars saved, we could move it to a brokerage and they could do something more aggressive like buy stock, but with so little money, that doesn't make sense for them just yet. They will be 14 next month, so next year they can actually get real jobs. At that point, I think their Roth IRA savings will start to become significant, so we'll be looking for a broker. I will need to keep this potential custodial issue in mind, so I'm glad that was pointed out on this string. That was very helpful information for me.
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I went to the T. Rowe Price website, but it still confuses me. How do I choose which funds to use for the IRA? I need a SEP-IRA for myself, and it looks like a ROTH for my son. I also couldn't find where to look for what they charge to do the services. Aren't there places which charge very little?
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I would take a look a what Vanguard can offer before making your final decisions. This is the link to their SEP-IRA Page:

http://tinyurl.com/7yf7t

You can probably manuver your way through the Vanguard site to answer most of your questions. Also, it may make things easier if both you and your son had your respective IRAs with the same fund company.

It's pretty difficult to make suggestions about what to put into your IRAs without knowing more about your financial siuations. Prior investments, how much risk you are willing to take on, how old you both are, etc. However, a good starting point would probably be the simpliest and to me that represents one of the new Targeted Retirement Fund-of-funds that does all the work for you:

http://tinyurl.com/267yb

Regards,
Bill
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When I had a smaller amount, they charged me $10 a year for each fund in my SEP-IRA, this year they started waiving the fees. If you are really confused, could you maybe call them? A few times they have gone over stuff with me over the phone.
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I went to the T. Rowe Price website, but it still confuses me. How do I choose which funds to use for the IRA?

Your first priority should be setting up the accounts somewhere. You can initially put the contribution money in a money market account for the short-term, and decide later which funds to invest in, after you've had more time to investigate.

I am not familiar with T. Rowe Price, but I am familiar with Fidelity and Vanguard. Fidelity has wonderful service, but over the long term will probably be slightly more expensive than Vanguard, when you include the expenses of their funds. If you wish to invest almost strictly in index funds, Vanguard is probably the place to go. If you think you'll be investing mainly in individual stocks, then you might want to consider Scottrade. So, pick a company based on your overall investing style. Initially put the money in a money market fund, then after doing your research, you can decide what specific vehicles (i.e. funds) you actually want to invest in.

IMHO, if you are fairly new to investing, index funds at Vanguard are probably the best option.

2old
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I agree with everything 2old4bs said, with the exception of opening the account with Scottrade. I have had nothing but bad service from them. Instead, you might try Firstrade, Choicetrade, Mytradz, Ameritrade or E-trade.
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I can say now that Scottrade did make it easy to do a custodial IRA when I set up the one for the last kid in the fall.

rad
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As a general comments though using a specific comment to set the context.

How old is you son ? Do you know what the age of majority is in your state for financial matters ?

My experience with custodial Roths is that it was hard to find a place that could do it(this may have changed).

It is less about what investment or where the IRA is set up. At least from my perspective it is about making each year work to the child's advantage by contributing. As the balance grows the funds can be moved to an account that makes sense at the time. Each year contributed to can have large impact later even if the funds were not to grow much at all for the first couple or 3 years. A balance of %6,000 at 21 vs just starting at 21 can make a world of difference.

John B. Corey Jr.
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