Employing Family Members: Can A Ten Year Old Put Their Earnings In A Roth IRA?

Dear Dr. Hayes,

You recently stated in a blog on employing family members that: "The level of compensation must be ‘reasonable’ to the child or spouse and good recordkeeping is an absolute must.

Also, the tasks that your child or spouse are charged with must be consistent with their age and skill level. You can’t reasonably put your ten year old daughter on the payroll for the purpose of maintaining your payables. But, she certainly may be a great sweeper or duster!"

All good advice, but my question is, can the 10 year old put their earnings into a Roth IRA?

Thank you,
Stacy

Dear Stacy,

Good question.

For those who may not be familiar with the Roth IRA (Individual Retirement Account), the advantage is that investments held in any IRA grow tax free.

How Roth IRA’s Differ

Unlike regular IRA’s, the money held in a Roth IRA is tax free when you take it out years down the road.

But, there is a catch in that you must pay regular income taxes on the money before you deposit it in the Roth IRA account. That’s one of the things that makes a Roth IRA so attractive to low income earners who are also very young.

The Power Of Compound Interest

To illustrate the power of compound interest, $10,000 growing tax free at the rate of 8% would be worth $469,000 in 50 years.

Knowing that your child could deposit that money now, let it grow and then take it out tax free in their 60’s certainly makes the Roth IRA an attractive opportunity.

Our CPA’s Opinion

Specific to your question about the taxpayers age, here is what our tax expert J. R. Armstrong, CPA had to say:

“Can a 10 year old put their earnings into a Roth IRA?

Absolutely.

This is a great idea because theoretically we would expect a low earning child to be in the lowest tax brackets. So, paying the tax on the earnings at a low rate now wouldn’t be the worst thing in the world.

Qualified distributions from the Roth later in life would be tax free. One would expect the child to be in a higher tax bracket at this time.

Please note, there is one exception. If the child is in the fortunate position of having an AGI (Adjusted Gross Income) over $101,000, the amount he or she could contribute to the Roth would begin to get phased out.

If the child had an AGI of over $116,000, they would be completely phased out and could not make a contribution."

J. R. Armstrong, CPA can be reached at May & Company in Vicksburg, MS at 601.636.4762.

Best Regards,
Jerry Hayes, OD

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Disclaimer: The information and opinions contained on this site are for discussion purposes only and are NOT intended to serve as legal, accounting or investment advice. ©2009 Jerry Hayes, OD. Not to be reproduced without written permission of the author.