Starting a Roth IRA for Kids In New York
The concept is great- A Roth IRA grows tax-free and the money comes out tax-free. So, if we can get the kids some money in there, they can have a tax free investment to dip into later, or they can let it grow for decades to really let compound interest work in their favor.
1. Anyone can contribute to directly to a Roth IRA, as long as they have earned income and meet the income qualifications (MAGI less than 137k single for 2021, or less than $203k married filing jointly for 2020). If we earn more, we can utilize the backdoor Roth IRA technique.
2. The contributed money must be earned income for a legitimate job. The contributions cannot exceed the minor’s earnings or $6000 for the year 2020 and 2021. That’s fine, my kids were covered here since I will be paying them from my LLC.
3. The child must do age-appropriate work for a “reasonable wage.”
I wanted to start my kids a Roth IRA with the money they earn for modeling on this site. It meets all the federal qualifications listed above. But, the execution of this in New York is somewhat more complicated.
State of New York rules
On the state level in New York, there are also several hoops I had to jump through in order to pay my children as models in my business.
First I had to register with ny.gov. Then I had to do form CE-200 to show that my business was exempt from workers comp and NY disability and paid family leave benefits insurance. This is because I’m paying them as contractors, not employees. If I wanted to employ them, I’d have to get all of these insurances which would make doing this whole process less desirable.
Then, I had to fill out the application for the certificate of eligibility to employ child performers as the employer. This required a $350 fee.
Then, I had to send a notice of the use of child performers.
Finally, as a parent, I had to get an employment permit for child performers.
All of this sounds very complex but thankfully, it could mostly be done online.
The yearly employment permit requires that a school letter be filled out, a health form be done by a physician to certify that the child was in good health and that the Child Performer Trust Account form be notarized to ensure that the employer deposits a portion of the child’s earnings into a UTMA.
I can see the reasoning behind all of this to make sure kids aren’t exploited but darn it leads to a lot of hoop-jumping for a parent who’s trying to pay their kids to put 100% of their earnings into investments for them.
Thankfully, the first permit can be obtained online for a 15 day period without having to fill out all the above physical forms.
I will have to do the 12-month forms this upcoming year though.
Taxes for the Kids
I ran everything by my accountant a couple of times and I would definitely advise you to do the same.
Because my kids earned less than $600 for the year, I did not have to provide them with a 1099.
Payments to children employed by parents are not subject to social security and Medicare taxes in a sole proprietorship, and they are also exempt from the Federal Unemployement and Tax Act (FUTA) Tax.
However, since they did earn more than $400, they will have to file a tax return.
But, the Tax Cuts and Jobs Act allows children employed by parents to use the $12,000 deduction for federal income tax, so they will essentially not pay any federal tax.
How to Actually Start a Roth IRA for Kids
I opened the kids’ IRA’s at Fidelity. It was quite easy to open them. However, contributing to the account was more complicated because for some reason, they could not link to Azlo, my business checking account. So, I had to transfer the money to my personal checking first and then to Fidelity.
Physician Finance Basics did a nice job of doing a step by step illustration.
Once the money is transferred, specific investments can be chosen. I chose 80% FSKAX (Fidelity Total Market Index Fund) and 20% FSPSX (Fidelity International Index Fund).
So, it was a lot of work upfront, but I hope when we look back 20 years from now, it will have been worth it!
Stay frugal, y’all!
Standard Disclaimer: Not meant as individualized financial or medical advice. A friendly reminder that I'm a doctor, not a financial professiona. Please consult a finance professional prior to making any big money moves.