Kid Roth IRA earned income match

Forum|Forum|3 years ago
January 10, 2023
2 replies
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Hello!

I have a kid who has $4,000 earned income (baby sitting, tutoring, etc.) in 2022, and I already put it into her Roth IRA.

I heard that parents can match that earned income and put extra money in their Roth IRA. Does anyone have a link to the IRS site explaining the details? I wonder how much I can put there.

Thanks!

Not A Product Question

Best answer by dmertz

There is no such match. Parents can gift money to the child in the form of a Roth IRA contribution (provided the child has sufficient compensation to support the contribution), but for tax purposes this is still a contribution of the child, subject to the child's contribution limit, no matter who makes the deposit.

Note that the money the child received must be reported on the child's tax return as income from self-employment. Assuming no other compensation, the maximum that the child can contribute for 2022 is the net earnings from self-employment or $6,000, whichever is less. Net earnings from self-employment are net profit on Schedule C minus the deductible portion of self-employment taxes. For $4,000 of self-employment net profit that would mean a maximum Roth IRA contribution of $4,000 - $283 = $3,717. If all of the child's net profit has been contributed, there is already an excess contribution to this child's Roth IRA.

D

dmertzAnswer

Employee

There is no such match. Parents can gift money to the child in the form of a Roth IRA contribution (provided the child has sufficient compensation to support the contribution), but for tax purposes this is still a contribution of the child, subject to the child's contribution limit, no matter who makes the deposit.

Note that the money the child received must be reported on the child's tax return as income from self-employment. Assuming no other compensation, the maximum that the child can contribute for 2022 is the net earnings from self-employment or $6,000, whichever is less. Net earnings from self-employment are net profit on Schedule C minus the deductible portion of self-employment taxes. For $4,000 of self-employment net profit that would mean a maximum Roth IRA contribution of $4,000 - $283 = $3,717. If all of the child's net profit has been contributed, there is already an excess contribution to this child's Roth IRA.

T

tbt2018Author

Employee

I see. When I say "match", I think I was misled by this sentence "If you want to contribute to your child's Roth IRA or match your child's contributions, that's fine as long as she has at least as much earned income as the total contribution amount" in this page: https://www.nerdwallet.com/article/investing/why-your-kid-needs-a-roth-ira

Now I think it means that, the money that goes to the kid's Roth IRA doesn't have to be the exact money that she earned - kids can spends their earned money, and the parents can contribute that same (or smaller) amount instead.

D

dmertz

Employee

Yes, money is fungible.

You making contributions on behalf of your child is no different than you gifting cash to your child and your child making the contribution deposit. In 2023 an individual can gift up to $17,000 to anyone before needing to file a tax return.

I can see where the use of the word 'match' in the nerdwallet web page can be a bit misleading, but in the same sentence is does say that total contributions can't exceed compensation (which may have already happened if the Roth contributions exceeded net profit reduced by the deductible portion of self-employment taxes).