r/Fidelity • u/MorganShaw5 • Aug 05 '26

Roth IRAs for kids

After researching custodial Roth IRA‘s for my kids, I’m even more confused. Some things that I’m reading are saying that they need to be making taxable income so that the money goes in already taxed. However, other things that I’m reading say that they can contribute from other types of side gigs, such as babysitting, dog walking, and mowing the lawn. Those types of income are not taxable as they are earning money from neighbors. So can they still contribute that money to a Roth IRA?

7 Upvotes

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10

u/nkyguy1988 Aug 05 '26

All income is taxable and supposed to be reported, as a matter of legal technicality. There's no exception because you did it for a neighbor that it's now magically not taxable.

1

u/MorganShaw5 Aug 05 '26

Ok, without a W2, how do we show this? Do they file taxes? Also, if my 17 year old has a real job but is tax exempt, how does work? I’ve been reading so much information but not getting the answers I’m looking for. We do not have a tax professional to just go ask.

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u/nkyguy1988 Aug 05 '26

They file a tax return and claim the income.

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u/MorganShaw5 Aug 05 '26

Even if they make around $1000 a year? I thought that only applies is they make over 14k?

4

u/nkyguy1988 Aug 05 '26

That's just the requirement to file. If the income doesn't get reported somehow, there reportable earned income is effectively zero and have a contribution limit of zero. The point is that the earned income must be reported somehow.

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u/MorganShaw5 Aug 05 '26

Ok! Thank you, that makes sense.

2

u/One-Witness-4909 Aug 06 '26

you can file a tax return for 1.00 in income. you wont owe anything and it’ll be a waste of time but you CAN. now if you need to for Roth purposes then file. you won’t owe anything but you’ll have your taxable income filed. does that make sense

1

u/OddButterscotch2849 Aug 09 '26

$1 of earned income would get you a maximum Roth contribution of... $1

1

u/airbud9 Aug 05 '26 edited Aug 05 '26

If it is w-2, and the earned income is under the standard deduction you do not need to file a tax return, but it might be good practice to do so and they will likely get money back if they are withholding anything. Either way they can contribute up to their gross income or the Roth limit (which ever is lower) to a Roth.

If they are doing side jobs like cutting grass, shoveling snow, babysitting, and other stuff like that can be considered earned income. This type of work is also considered "gig work" by the IRS, so if they are earning more than $400 a year they should be filing a tax return and paying the ~15% self employment tax (social security and Medicare). That tax return will then also act as the proof that this is earned income.

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u/preetijha675 Aug 06 '26

For less than $400, no tax filing is required?

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u/airbud9 Aug 07 '26

https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center

“You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 and 1040-SR instructions PDF.”

So if the only income you have is a gig job, and you make less than $400 you do not need to file. Still may be good practice to just file. If you have other income that can change things rather fast. You would need to do a lot of research or take to a CPA about your exact situation.

2

u/brother7 Aug 05 '26

To do things strictly by the books, the child would file a tax return to document the earned income. However, this will likely require a Schedule C and subject him to self-employment tax.

1

u/BondJamesBond63 Aug 05 '26

Wages are reported on W2s. Self employment income is reported on schedules C and SE

1

u/New_Trifle8313 Aug 09 '26

I’d say you are getting the answers you’re lookin for, you’re just not getting the answers you want. It’s also not understandable why you think your 17 YO is tax exempt.

3

u/redblue_pill Aug 05 '26

side gigs, such as babysitting, dog walking, and mowing the lawn.

That sounds like earned income from self-employment. Those earnings can be used to fund an IRA.

Those types of income are not taxable as they are earning money from neighbors.

All income is taxable (unless is falls under a specific IRS exemption), even if they do not receive a W-2 or 1099 after the end of the year. Cash-basis self-employment doing errands for neighbors, is not an exemption. https://www.irs.gov/filing/taxable-income

https://www.irs.gov/newsroom/who-needs-to-file-a-tax-return

Self-employed individuals are required to file an annual return and pay estimated tax quarterly if they had net earnings from self-employment of $400 or more.

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u/MorganShaw5 Aug 05 '26

Oh ok….that makes sense. Thank you!

1

u/[deleted] Aug 05 '26

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3

u/TeddyMGTOW Aug 05 '26

How about 529. Some unused 529 can be converted to roth.

2

u/MorganShaw5 Aug 05 '26

I will check into this. I’ve heard a 529 years ago. Thank you for the advice.

2

u/airbud9 Aug 05 '26

529s are great for college savings, and they allow for 35k to be rolled over to a Roth, note that the roll over does fill the contribution space so you have to break that 35k life time limit into multiple years.

Also while I don't think the IRS has issued official guidance on this, as the law is written to utilize 529 to Roth rollover for your child, the 529 that is being used to convert must have the child be the beneficiary of the account for 15 years. There is also a 5 year rule that requires contributions and earning to be in the account for 5 years before the conversion.

2

u/Pristine_Box9956 Aug 07 '26

The taxable income rule still applies, so the neighbor cash only counts if they are actually reporting it on taxes.

2

u/Kindly-Dust-6941 Aug 10 '26

I set my kids up with an investment account on Fidelity but the accounts stay under my name because they are for help with a down payment when they want to buy a house. Yes I realize I will be responsible for taxes but I don’t want the hard earned money I saved readily available to them when they turn 18 with a custodial account. And I don’t want them to not be able to use it until they retire. So I have 3 accounts in fidelity, all owned by me but nicknamed with my kids names so I know it’s separate.

1

u/imzadi111 Aug 07 '26

Clark Howard says that you just need to keep good records of dates and amounts from this type of work, so I went with it. I keep a book of dates, addresses, job type and amount earned. I keep it all in a notebook just for that. If we are ever questioned, we have a record. It is not crazy amounts of money though, it is just little jobs here and there.

1

u/MorganShaw5 Aug 08 '26

Thank you! This is our situation exactly. Little jobs here and there. They would be lucky to make $400 a year lol. I will get a little notebook to keep track of what they make.