Roth ira and parent claiming child

[Txmex24]

I have a friend who put money into his 2021 Roth IRA from his savings account and he maxed it out, but his dad is claiming him on his taxes and he doesn't know how to report it because my friend hasnt made any income this year and that was saved money. Do you know what we should do?

[VolvoGirl]

Sorry he has to take it out of the ROTH IRA.  You can only contribute from earned income like a W2 or a Net Profit from self employment.   

[Bsch4477]

You can only contribute to an IRA based on your earned income. If he had no income he should withdraw his contribution to avoid penalties. 

[Txmex24]

If he says he mowed yards and made $6000 cash.  Does he file his own and then mark that someone can claim him since his dad will?

[Opus 17]

It has nothing to do with whether or not he is claimed as a dependent.  You can only contribute to an IRA if you have "compensation" for performing work (earned income from working, or self-employment, or certain commissions, or certain post-graduate fellowships).  

He needs to contact the plan to process a "return of excess contributions."  He gets his contributions back plus any earnings.  The earnings will be taxable on his 2021 tax return plus a 10% penalty for early withdrawal.

If he leaves the money in the account, he pays a 6% penalty this year and every year after that the excess remains in the account.  If he has income from working in the future, he can "use up" the excess by applying the excess toward that years' limit.  (In other words, if he has a job in 2022, he can consider the 2021 excess as his 2022 contribution, and it won't be considered excess after next year's tax return.)

[VolvoGirl]

Did he?   Yes he would need to file his own return as a dependent.  He will owe about $850 for self employment tax.   Then he can only contribute the Net Profit - 1/2 of the SE tax.  So 6,000-425= 5575.

[Txmex24]

Yes he mowed yards.  So he will claim the SE and the ira stuff on his and then mark that someone can claim him?  And then his dad can claim him correct?

[Opus 17]

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@Txmex24 wrote:

Yes he mowed yards.  So he will claim the SE and the ira stuff on his and then mark that someone can claim him?  And then his dad can claim him correct?

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If he was self-employed, he should report his gross income on schedule C and can deduct legitimate expenses, and pay income tax and self-employment tax on the net profit.  If his income is less than $12,550, he won't owe income tax but he will still owe self-employment tax.  Most of the time, a child working does not contribute enough to their own support to be disqualified as a dependent of their parent, but he does need to answer "yes, I can be claimed as a dependent" on his own tax return.

His "compensation" for making IRA contributions is his net income (after expenses), minus half his self-employment tax.  That's 92.35% of his net income.  So if he reports $6000 of self-employment income and no expenses, he will have $5541 of compensation and can contribute up to $5541 to an IRA.  (He will also pay $848 in self-employment tax). 

[SweetieJean]

If he says he mowed yards and made $6000 cash. 

Does he have proof of that?

[Txmex24]

Yes can get statements 

[smellcoffee]

If he child makes less then the required amount to to file and doesn't file can there still be a Roth contribution... in this case $1200 for the year?

[Bsch4477]

If the income was earned income the child can contribute to a Roth IRA —$1200 in your case. Filing a return is not required.