All right. So we've got a couple of emails from people that didn't want to leave a name.
Anonymous. That's a name.
Thank you. "Can I open a Roth IRA in my daughter's name? She is earning money from babysitting.
She is twelve years old. Thank you." Yeah. If she's got earned income.
Yeah. She's gonna have to report it though.
She's gotta file a tax return.
Not everyone reports their babysitting income. Did you?
I've never babysat a day in my life. (laughs) Well, I babysit every single day of my life,
actually, I've got 78 babies that I look after.
78?
isn't it? 78 or 80? How many people we got here?
Oh, at Pure? Yeah. Okay, I got it. I suppose you report that income though. (laughs)
(laughs) Yes I do. I do report that income. It's not enough. What's the ruling on that, Big Al?
How does someone do it, I guess, is a better question.
Yeah okay. Well first of all, so a Roth IRA, it's a retirement account that you contribute
to and you do not get a tax deduction. But the money grows tax-free in the account, and
so when it's withdrawn later, presumably in retirement, then all the proceeds are tax-free.
So there is no age limit - somebody that's twelve and has babysitting income could open
an account. They probably don't have the resources to do it, but Grandma's thinking maybe she'll
do it, or Mom will do it, whatever. So in that particular case, yes, that can be done.
So the Mom or the Grandma opens the account in the daughter's name. And so it's a Roth
IRA. I guess, would it be a minor account? I'll ask you that question, probably, huh?
Yeah.
So a minor Roth account. I've never actually done one but that seems like that's what it
would be, probably.
Yeah we've done them a few times because we have that program, 40 under 40. And so we've
had some custodial, I guess is what they're really called, for the technical name.
Okay. Got it.
But just from a legality or tax standpoint, as long as there is earned income up to $5,500,
she can contribute up to $5,500 but she's got to prove that she made $5,500. So she's
got to file a tax return even though she probably is not going to be taxed on that $5,50 because
the standard deduction is going to be more than that.
Yeah except she might have to pay self-employment tax on that, which is part of it. And you
just alluded to one of the keys here. Because a lot of times when you're younger and you're
doing babysitting, even though technically you're supposed to report it as income, does
that happen? Not regularly. (laughs) Just being honest. And so if you want to open up
an IRA for your daughter, granddaughter, whatever, then they're going to have to file a tax return
and show earned income for you then to contribute into a Roth IRA in their name.
So it's worth it.
Yeah. And the way it works: so let's just say she made $2,000 babysitting income, then
you could open up a Roth IRA for $2,000. You can't do anymore. You could do less. The maximum
is $5,500. And so if she earned up to that amount you could max it out, but otherwise
you're limited to the earned income.
So get her to file a tax return. And then she can file the higher of the two: $5,500
or $6,000 for 2019, or her earned income.
Yeah. Now sometimes what folks do, if they have a business, so they get their kids on
the payroll - as long as they can justify the kid is earning wages. Doing something
for that wage. And it's appropriate pay. Kid can't show up for one hour and get paid $10,000.
It's not gonna fly with the IRS. So they actually have to be doing something bonafide and getting
fair pay for that. But once they do that, so it's income to the child who's in a low
tax bracket, it's a deduction to you as the business owner, and now the child has earned
income that you could open up a Roth account for them. This is particularly important,
I think Joe when kids are in college or close to college. You put your kids on the payroll,
you get a tax deduction, and then they pay tax on it, but they have a low tax rate. And
then they take the money that they're making from the business and they use it to pay for
college. And in a roundabout way, you sort of pay for college expenses and get a tax
deduction that way.
Yeah. I mean this only applies to small businesses, and there have been all sorts of ideas that
come across our desk. "I'm going to create an internet business (laughs) that's not really
a business. And we're going to create the expenses and then I'm going to put the family
on the payroll and we're gonna create the payroll and run it through..."
Right. No, we see that, yeah. So you have to have a profit motive. And the way to show
a profit motive is actually to make some sales, right?
So how many years, what's the leniency here for me being a really bad business owner?
Let's say, "hey, I started my business." So what, two years? And then it's a hobby? Is
that the rule?
Well, it could be. So the rule is this: you're supposed to show a profit 3 out of five years.
Otherwise, the hobby loss rules could come into play. But as a longtime CPA watching
the IRS administer this rule, you could be a great business owner and lose money for
10 years because you're developing a technology, or like some of the drug companies that are
trying to discover a new miracle drug, it may be 20 years before they actually make
a profit. So that really is not so much the issue. The issue is that if you are not making
a profit in three out of five years, you better be able to show that you have a business.
In other words, it can't be, "Oh, I'm a coin collector and I going to make money selling
coins." And five years go by and you've never had a sale. That's what they're trying
to get at.
Right. Well, we have a client that does very well collecting buttons. Right?
Yeah. That's true, you're right about that. So it can be done.
I mean these are pretty rare buttons. (laughs) First time we heard it we're like, "buttons?
I thought, like, really? Buttons? (laughs) "Yeah!" And then all of a sudden it's like,
wow, yeah, you can make a lot of money, apparently.
Who knew, right?
Yeah she's killing it.
I need a button on one of my suits. It broke, need to call her up.
Well that would be kind of cool.
Might be a really expensive button. (laughs)
Might be a $10,000 button on Big Al's suit.
I'd make her year. (laughs)
Yeah. And it'd make you look like a d-hole.
Well, and that suit has, gosh, it has two coat buttons and it probably has four buttons
on each sleeve.
And you lost them all?
No, just one. But I want to get a matching set. Might cost $100,000.
And if you get fancy buttons then you have to worry about them falling off too.
True, yeah.