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<<If when grandma babysits, you pay her. Grandma opens a RothIRA contributing $2000 a yr, with junior as her beneficiary.

Any downsides?>>

Just a couple, though not major. I'm assuming that grandma is retired, and does not have any other earned income. If true, then the IRS will want proof that the amount of money she puts away in the Roth was truly from earned income. The best way would involve a W2 form. This means that not only will Fed and State taxes need to be taken out of her babysitting earnings, but ~ 15% in self employment tax (i.e. both halves of the Social Security tax) as well. Thus, you'll need to pay significantly more than $2k to grandma to allow her to clear the full amount to maximize the Roth IRA contribution.

If grandma (or grandpa) is still working at least part-time for a few years, then this expense and recordkeeping hassle can be pushed off (unless grandma is keeping the kids so that you can go to work, and in that case since you may want to declare the childcare expenses in order to receive a tax deduction/credit, grandma will need to declare the income on her tax return). Of course, if she/they are still working, it is highly likely they'll already be contributing to a Roth for their own retirement purposes.

On a more practical note, you must realize that whatever money you pay to grandma is hers. Although you and she may enter into this agreement planning to fund junior's retirement through inheritance, she could change her mind at any moment. Most likely this would be because of unforeseen monetary needs (investment setback, catastrophic health expenses, long term care costs, etc.), but if junior pisses off grandma at some point, she may decide to make him work for a living and pass the winfall on to someone else. :)

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