Custodial Roth IRA and what’s exactly earned income is?

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  • #71894
    Sasha
    Participant

    Hello,

    I hope my question will be easy for people here as I seem to be wandering around without finding any concrete answers.

    My teenager started a minimum wage job in the summer. It’s been agreed that we’ll open a custodial Roth IRA for that money. My understanding is that if the earned income (Gross, not net) is $6k or less for 2021, the full $6k can be contributed to the Roth IRA provided that the parents agree to cover the withheld taxes. Is my understanding correct?

    To use the actual figures, there will be $2,000 Gross income for 2021. SS 6.2% and MC 1.45% were withheld. Can we invest $2k in the Roth IRA for this minor?

    Thank you.

    PS. Could you also please confirm that because the gross income is so meager, the minor doesn’t need to file 1040 form for 2021 either? Thanks
    I read that the threshold for 2020 was $12,400 a single and based on this I assume that my child doesn’t need to do any paperwork for 2021.

    #71913
    Kaye Thomas
    Moderator

    Your understanding is correct: the gross amount of wages is what limits the amount that can be contributed to an IRA. This will be the amount reflected in the box on Form W-2 labeled “Wages, tips, other compensation.” More on the subject of qualifying income (unlikely to be needed in your case) is available here:

    Qualifying Income for IRA Contributions

    The source of funds for the contribution doesn’t matter. It can be money saved from the wages or money from parents or anyone else.

    This amount of income is below the threshold for filing a return, and the Roth contribution will not trigger a filing requirement. If income tax was withheld from the wages, a return will be needed to get that amount refunded.

    #71918
    Sasha
    Participant

    @Kaye Thomas, Thank you for your quick and helpful response.

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