Kid Roth IRA earned income match

[tbt2018]

Hello!

I have a kid who has $4,000 earned income (baby sitting, tutoring, etc.) in 2022, and I already put it into her Roth IRA. 

I heard that parents can match that earned income and put extra money in their Roth IRA. Does anyone have a link to the IRS site explaining the details? I wonder how much I can put there. 

Thanks!

[dmertz · Accepted solution]

There is no such match.  Parents can gift money to the child in the form of a Roth IRA contribution (provided the child has sufficient compensation to support the contribution), but for tax purposes this is still a contribution of the child, subject to the child's contribution limit, no matter who makes the deposit.

Note that the money the child received must be reported on the child's tax return as income from self-employment.  Assuming no other compensation, the maximum that the child can contribute for 2022 is the net earnings from self-employment or $6,000, whichever is less.  Net earnings from self-employment are net profit on Schedule C minus the deductible portion of self-employment taxes.  For $4,000 of self-employment net profit that would mean a maximum Roth IRA contribution of $4,000 - $283 = $3,717.  If all of the child's net profit has been contributed, there is already an excess contribution to this child's Roth IRA.

[TomD8]

For 2022, the IRA contribution limit for taxpayers under age 50 was $6,000 or, if less, the taxpayer's taxable compensation for the year.

If you wish, you can make the contribution out of your own funds on your child's behalf, but the total contribution can't exceed the IRS limit.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-li...

[tbt2018]

I see. When I say "match", I think I was misled by this sentence "If you want to contribute to your child's Roth IRA or match your child's contributions, that's fine as long as she has at least as much earned income as the total contribution amount" in this page: https://www.nerdwallet.com/article/investing/why-your-kid-needs-a-roth-ira

Now I think it means that, the money that goes to the kid's Roth IRA doesn't have to be the exact money that she earned - kids can spends their earned money, and the parents can contribute that same (or smaller) amount instead. 

[dmertz]

Yes, money is fungible.

You making contributions on behalf of your child is no different than you gifting cash to your child and your child making the contribution deposit.  In 2023 an individual can gift up to $17,000 to anyone before needing to file a tax return.

I can see where the use of the word 'match' in the nerdwallet web page can be a bit misleading, but in the same sentence is does say that total contributions can't exceed compensation (which may have already happened if the Roth contributions exceeded net profit reduced by the deductible portion of self-employment taxes).

[bluetaxbird]

Hi, can you please explain this: " If all of the child's net profit has been contributed, there is already an excess contribution to this child's Roth IRA." I don't understand what do you mean by excess contribution when $4000 or $3,717 is under $6000 limit? Thank you

[DanaB27]

For 2022 the total contributions you make each year to all of your traditional IRAs  and Roth IRAs can't be more than:

• $6,000 ($7,000 if you're age 50 or older), or
• If less, your taxable compensation for the year

If you are self-employed your taxable compensation is your net profit (line 3 of Schedule 1) reduced by 

• The deduction for contributions made on your behalf to retirement plans (line 16 of Schedule 1), and
• The deduction allowed for the deductible part of your self-employment taxes (line 15 of Schedule 1).

Therefore, if you contribute the full net profit from line 3 Schedule 1 then you already contributed more than the taxable compensation and therefore made an excess contribution.

@bluetaxbird 

[dmertz]

@bluetaxbird , in this instance the maximum permissible IRA contribution is limited by net earnings.  Net earnings are net profit minus the deductible portion of self-employment taxes.  $4,000 of net profit in this case means in net earnings of $3,717, so a $4,000 contribution would be $283 in excess of the maximum permissible contribution of $3,717.

[bluetaxbird]

When filing IRS forms, do they ask detail about earned income, like how many hour, where, when or min wage?

[AmyC]

No, the IRS receives tax forms and I am assuming your child did not due to sporadic activities for income. The income can be claimed as misc income.

 To enter the income follow these steps:

1. Go to Federal section
2. Scroll down to Less Common Income
3. Select Miscellaneous Income, 1099-A, 1099-C selection
4. Select Other Reportable Income,  START
5. Any other taxable income, select YES
6. Enter description, something like odd jobs
7. Enter the amount 
8. Click Continue

Then you can enter the IRA contributions. See Where do I enter my traditional or Roth IRA contributions?

@bluetaxbird 

[bluetaxbird]

Hello Guys, I opened a Roth account for 6 years old with her having $1000 income from house work and recycle cans, their parents match another $1000, so 6 yrs old has $2k in the Roth, but Turbo tax desktop version will not get pass the Roth question, basically said the kid has 1k income and I tried to put 2k in Roth. 

https://www.fidelity.com/learning-center/personal-finance/retirement/turbocharge-childs-retirement

As an alternative, you may want to consider an arrangement where you or another adult make contributions as gifts to reward the child for working, or one where the child contributes a portion of his or her earnings to the Roth IRA and you match that amount (assuming the total doesn't exceed the lesser of the child's earned income for the year or $6,500).

Please advise, thank you.

[dmertz]

For the money to be considered to be compensation, it would have to be reported on the child's Schedule C as income as self employment.  Payment to a child for doing normal household chores would not typically be considered to be income from self-employment.  Even if $2,000 was reported as self-employment income, some amount would go to self-employment taxes so the Roth contribution would be limited to less than $2,000.

Unless corrected by a return of contribution before the due date of the child's tax return, the excess Roth IRA contribution must be reported and the 6% penalty paid with the child's tax return.  If by April 15 the child files the tax return or requests a filing extension, the deadline to obtain a return of the excess contribution is extended to October 15.

[tbt2018]

From the readings so far, I don't think you can "match" the amount as you described. - If the kid earned $1,000, the most amount the kid can contribute to Roth IRA is $1,000 minus self employment tax (about 20%-ish). You can't give him another $1,000 as "match" to make his total as $2,000 (minus self employment tax). 

Wherever you see "match", it means that, for example, kid earned $1,000 but used all that money and bought ice-cream and ate all of them. But now he wants to contribute to Roth IRA but he has no money now. My understanding is that under this case, you can give ("match") him $1,000 for this goal. Basically his total contribution can't exceed his total earning.