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ROTH IRA for child

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Mar 31, 2009 1:27 pm

First off, I know the Roth IRA rules…

So I am getting mixed responses on the use of Roth IRA's for children.  From what I understand, children can have earned income even if they do not get a W2 (i.e. babysitting, lawnmowing, etc., but NOT allowances).  So theoretically, they (or generally the parent) could fund a Roth up to their earned income amount.  However, I have a client that insists he can allocate funds to his childrens' Roth's, even though they are only like 3 years old (and younger).  He claims his CPA told him "everyone does this", and he said the "guy" at Scottrade said the same thing.  Now, I think he is either not getting his facts straight, not telling his CPA and/or the Scottrade "guy" everything, they are all willing to test the IRS, he is just blowing smoke to see if I would do it, or there is just something I am not aware of.  Anyone have thoughts on this?  My B/D says no, CPA's I talk to say no.   Incidentally, he is NOT a business owner.  And his point of doing this is that he read in some magazine that 529's are the "worst investment out there" for education, and that you should be funding a Roth for your kids.  Fine, I get your point.  But I still don't know how we get the Roth funded for little ones.
Mar 31, 2009 1:54 pm

I don’t know. When I run into a small fish like this guy, I tell them to call an EDJ broker because they specialize in small accounts. 

Mar 31, 2009 1:59 pm

You said it, a child has to have earned income.  How in the hell does a three year old have earned income?  He is testing the IRS and it would blow up if he got audited.  He’s just betting that he won’t.  I’d tell him that he can’t and if he wants to do this then go to Scotttrade, he’s not going to do it with you. 

Mar 31, 2009 2:00 pm

Sounds like you’ve got several issues with this so-called client that go well beyond those being raised, as those who put more weight on something they hear or read in a magazine over what you are telling them can hardly be considered an ideal client, but I assume you know that already so I won’t belabor the point.

Here’s my suggestion on the Roth thing, B24. Ask your client to have his CPA, whom he pays specifically for his tax expertise, to send you an email stating his opinion about this, including his relevant citation so that you can all work together as a team on the client’s behalf. If the CPA balks at doing so, ask the client why his paid tax expert would do that. If he provides the written documentation, you at least have something specific to investigate. I wouldn’t hold your breath waiting for a response.

My guess is that this guy is trying to use the strategy more commonly used by business owners of (briefly) “hiring” children (even very young ones) to provide some sort of service to the business for which they are compensated, thereby qualifying the child to have sufficient income (and cash) to make a Roth contribution. How he would hope to do that without owning a business is a mystery. But you can always take the attitude with the client that If this CPA has found a legitimate way to do something like that you would be thrilled, not only for this client but for others as well.

You don’t have to play the heavy. Hey - you hope like hell this is true, since you are an investment expert, not a tax expert. Put the onus back where it belongs - in the CPAs lap. That way he’s the one letting down this guy, not you.

Mar 31, 2009 3:21 pm

Thanks Morph.  That was sort of the plan.  Here's the deal - the wife is a good client and has a lot of money with me.  He's sort of a d1ck.  Always challenging me on things (but not the "respectful" type of challenging that I can appreciate).  I have told him that he should just open the account at Scottrade.  I think his wife thinks he's a d!ick too.  She and I have a good relationship, so I have to at least give the courtesy of trying to help him.  I just wanted to make sure there was not some obscure rule I was missing.


Mar 31, 2009 3:24 pm

I don’t know. When I run into a small fish like this guy, I tell them to call an EDJ broker because they specialize in small accounts. 

  Thanks for the feedback.  Very helpful.  Incidentally, his wife has a lot of money with me from an inheritance, otherwise I would have sent him on his way 5 minutes into the conversation.