Contributing to your child’s Roth IRA

[jyeh74]

When a parent contributes to the child’s earned income into their child’s Roth IRA, do they have to report it somehow? Is it captured under charitable contributions?

[macuser_22]

A parent cannot fund a child's IRA.   IRA contributions can only come from the  taxable earned income of the child.

Such as baby sitting income, lawn cutting for neighbors, a part time job, etc.

(Taxable compensation is generally wages that you worked for - W-2 or net self-employed income minus the deductible part of the SE tax, but can include commissions, certain alimony and separate maintenance, and nontaxable combat pay ).

See IRS Pub 590A "What is compensation" for details:

https://www.irs.gov/publications/p590a#en_US_2020_publink1000230355

IRA contributions are NOT charity. 

Roth contributions do not need to be reported on a tax return.

[jyeh74]

@macuser_22  According to this link and speaking to tax folks, a parent can contribute and match the child’s earned income.   So if a child makes $1500 a year, a parent can contribute $1500 into the custodial Roth IRA. So total, they can put $1500 + $1500 = $3000 into the custodial Roth IRA. So yes, a parent can contribute to a child’s Roth IRA. And no, it doesn’t have to be shown under a W2.  Earned income can be cash from babysitting or household chores.

https://www.consumerreports.org/retirement-planning/give-the-gift-of-a-roth-ira-for-the-holidays/

[macuser_22]

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@jyeh74 wrote:

@macuser_22  According to this link and speaking to tax folks, a parent can contribute and match the child’s earned income.   So if a child makes $1500 a year, a parent can contribute $1500 into the custodial Roth IRA. So total, they can put $1500 + $1500 = $3000 into the custodial Roth IRA. So yes, a parent can contribute to a child’s Roth IRA. And no, it doesn’t have to be shown under a W2.  Earned income can be cash from babysitting or household chores.

https://www.consumerreports.org/retirement-planning/give-the-gift-of-a-roth-ira-for-the-holidays/

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Did you read that link?  It does NOT say you can match the income.   It says:

The child needs to have earned income. The IRS is fine with parents and grandparents (and anyone else) giving someone the money to contribute to a Roth IRA. In 2019 the maximum contribution rises to $6,000.

The only catch is that the recipient must have earned income that is at least equal to the amount contributed. So if a child made $1,500 this year, you could give her $1,500 toward a Roth IRA. “Babysitting, lifeguarding, mowing lawns are fine,” Berno says. “The only rule is that it has to be earned income, not investment income.”

[jyeh74]

It says “match” here also

www.marottaonmoney.com/fund-your-childs-roth-with-chore-income/

Roth IRA Funding

“Once your child has earned the income, then your child is eligible for an amount of Roth IRA funding. There are many ways for you to get money into the Roth account.

First, the money that is contributed does not need to be the very same money they earned. Unlike a 401(k) plan, which requires salary deferrals in order to fund, you or anyone else can fund your Roth IRA with any money.

The child can contribute. Parents can contribute. Grandparents can contribute. A random friend can contribute. The only hitch is that you are limited in how much you can contribute up to their earned income or this year’s IRA contribution limit whichever is smaller.

If you want to maximize the amount that is put in while still giving the child a choice, one clever suggestion is that you or a grandparent could offer a Roth contribution match as gift. For example, every dollar the child contributes, you promise to also contribute one dollar. In this way, the child can save half of all their earnings as spending money while still getting the full allowable amount into their Roth IRA to grow tax-free.”

So yes you can match what the child earns.  They earn $1500, you can match $1500 and contribute $3000 total.  Unless I’m totally misunderstanding and it’s only $1500.

[macuser_22]

That link gets an error.

All that matter is the tax law an how then IRS interprets it .

IRS Pub 590A

he most you can contribute to all of your traditional and Roth IRAs is the smaller of:

For 2019 and 2020, $6,000, or $7,000 if you’re age 50 or older by the end of the year; or
your taxable compensation for the year.

What Is Compensation?

Generally, compensation is what you earn from working. For a summary of what compensation does and doesn’t include, see Table 1-1. Compensation includes all of the items discussed next (even if you have more than one type).

Wages, salaries, etc.

Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.

There is no such thing as "matching funds" in the tax law.

[jyeh74]

I’m not sure why I can link the consumerreports link but not the marrotaonmoney link.

So what you’re saying is if the child earns $1500 a year.  Parent or grandparent can put $1500 into the custodial Roth IRA.  Child can keep the $1500 that he worked hard to earn but cannot add another $1500 into their custodial Roth IRA because the parent or grandparent already contributed?

[macuser_22]

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@jyeh74 wrote:

It says “match” here also

www.marottaonmoney.com/fund-your-childs-roth-[product key removed]e/

Roth IRA Funding

“Once your child has earned the income, then your child is eligible for an amount of Roth IRA funding. There are many ways for you to get money into the Roth account.

First, the money that is contributed does not need to be the very same money they earned. Unlike a 401(k) plan, which requires salary deferrals in order to fund, you or anyone else can fund your Roth IRA with any money.

The child can contribute. Parents can contribute. Grandparents can contribute. A random friend can contribute. The only hitch is that you are limited in how much you can contribute up to their earned income or this year’s IRA contribution limit whichever is smaller.

If you want to maximize the amount that is put in while still giving the child a choice, one clever suggestion is that you or a grandparent could offer a Roth contribution match as gift. For example, every dollar the child contributes, you promise to also contribute one dollar. In this way, the child can save half of all their earnings as spending money while still getting the full allowable amount into their Roth IRA to grow tax-free.”

So yes you can match what the child earns.  They earn $2000, you can match $2000 and contribute $4000 total.  Unless I’m totally misunderstanding and it’s only $2000.

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"So yes you can match what the child earns.  They earn $2000, you can match $2000 and contribute $4000 total.  Unless I’m totally misunderstanding and it’s only $2000"

You are reading what is not there.

It said:  "The only hitch is that you are limited in how much you can contribute up to their earned income"

Which is correct.   If the child earned $3,000 then the *child* does not need to contribute *that* $3,000 to the child's IRA, someone else can contribute $3,000 to the IRA, but the total contribution to the IRA cannot exceed $3,000.

That is poorly written, but does not mean that $6,000 can be contributed, which would violate tax law.