Roth for grandson

[Bmeehan]

I have a 2yr old grandson and would like to open a custodial Roth IRA for him. I understand this is permissible as long as he has earned income. Can I commission him to produce a finger painting to generate the earned income?  What documentation will we need to prove the income?  Should we file a tax return for him?

[Anonymous]

considering his age, i don't think the IRS would buy it.    while I'm not a lawyer, generally a minor does not have contractual capacity.  

if the IRS rejects you tax avoidance scheme then you'll have have plenty to worry about besides the penalties for an excess Roth contribution.  

besides how much do you think you can reasonably pay him for a finger painting.   

[dmertz]

A 529 plan contribution would be a lot more sensible.

[Bmeehan]

As for age, there is no age restriction on opening a IRA. For example, it is perfectly legal for a child to have earned income (e.g. a teen babysitting outside their household) and putting up to the amount of earned income in an IRA. In fact, their parents can let them spend the money, and the parents can fund the IRA.

You are correct, a minor cannot sign a contract, that is why the IRA would have to be held in a custodial account For Benefit Of (FBO) the child until the child reaches the age of majority.  This is no different than if a child receives an inheritance.

I’m not trying to avoid taxes, but trying to follow the law, and use the tax law to my family’s benefit.  This is no different than anyone else placing earned income in a IRA to save for retirement.

The key is the earned income.  Everything I’ve read says sales from hobbies and art is considered earned income and must be reported as such. 

I reasonably believe a finger painting would be worth $6,000, the maximum contribution limit for an IRA.  Who is able to tell me otherwise.  And no, I don’t plan to sell it in the future at a loss to offset capital gains. 

[Bmeehan]

Any unused money in a 529 plan is taxed as follows:

• Earnings taxed as income
• 10% penalty 

Contributions to a Roth can be used to fund education if needed. 

The benefit of the Roth is that it is never taxed, and he could let it compound for 60+ years

[TomD8]

Being in possession of a painting that you "reasonably believe" is worth $6000 (or any other amount) does NOT constitute earned income for your child and does NOT qualify your child for a Roth IRA.

Suggest you read the IRS definition of earned income in this reference: https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/earned-income