Personal Finance @lemmy.ml root @lemmy.world 1 yr. ago

IRA for a child

I've heard this is a good way to set your kid up for success and take advantage of compounding. One of the parts I always get caught up on when looking into it, is that your kid needs some form of taxable income, and whatever they contribute, you can match it.

If you have a child that is just a couple years old, how do you accomplish this? I can't just say I pay her $3000 a year for picking a book to read each night..or can I?

18 comments

Your kid would need reported W2 income to be eligible. Start a 529 plan instead.
- Agreed that a 529 seems to be the right answer. Be aware that it does have its own rules and limitations (main goal is for it to be used towards education), which I believe can be broken for a percentage fee.
  
  Right. I set up one of these when my child was born, but was looking for other options as well. The 529 will probably reach it's peak right before college, where as an IRA will (potentially) grow for another 40 years
- It doesn't have to be W-2 income, but that's a lot easier than other options to justify to the IRS. But as long as the money is coming from someone not directly related to the child for work actually done, you don't need a W-2.
  
  So if the child does modeling or other contract work, it counts. Birthday money and allowances do not.
  
  I see. So how do most people do this for their kids? Do they report their income and have their children pay taxes?
- I have one of those setup already. Was just trying to do as much as I can
I'm no expert, but I'm gonna say no. Your child would need to have earned income. Allowances or getting paid for household chores isn't going to cut it.
My state gives me 10% back as tax refund for contributing up to $5000 a year to my kids 529.
- I need to look into that for mine. I live in Ca but I have a NY 529 (they have a solid performance history). So I wonder if I'd still qualify for any incentives
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