Excess Roth IRA contrib

[Catherine]

Well, this one is a twist on a topic I've seen once or twice.

Parents have a business and were going to hire the two kids to work in the business.  I cautioned them about the kids needing to do actual work and not merely be a cost-shifting tactic - and that at ages 6 & 9, that was a bit young to be getting serious work done.  Parents ended up not putting kids on payroll for 2016.  But they did put $5,500 for *each* child in a Roth IRA.  Obviously that needs to be removed and reported.  They have removed the excess contributions and the growth - but how do I report this?

The kids would otherwise have zero need to file.  Can this be reported on the parents' return or do we need to file for the kids?  And do I wait for 2017 returns - since that is when the 1099-R will be issued - or does it go on 2016?  The Tax Book had all kinds of useful information on calculating contribution limits and where to report x, y, and z - but nothing specifically germane to this oddball situation.

[Lion EA]

Not the question you asked, but have the parents check on working requirements for minors before they put their kids on payroll.  In CT, kids get their working papers from their high school counselor.  Different ages for different occupations, but I think 16 for office work, older for restaurants, labor, more accident-prone jobs.

[Catherine]

Good point, @Lion EA, and one I had not considered.  It is possible for kids to work younger than teens (think of child models, for example) but I have never looked at the rules.  When my girls were little and they worked for me, I paid them out of pocket and did not attempt payroll.  They got $1 for each 1/2" of paper stacked for shredding, and I would put the shredder in the living room and they would feed it during commercial breaks while they were watching their favorite shows (they each got one 1/2 hour show a day to watch, and were allowed to watch their sister's show as well).

[Pacun]

I also put my daughters to work and Watch TV. We watch TV for 30 minutes while Alex Trebek is on air. My High School Senior gets a quarter for each correct response while my 2nd grader gets a whole dollar for each correct response. 2nd grader has the first chance to talk and my senior daughter goes next and have to be before the TV participants or Alex say the correct answer. I hope I am not violating any labor laws and of course they are NOT in payroll.

I wonder if my daughters can open Roth IRAS with that money?

Going back to the question at hand. You should deal with the returns when you have the 1099-R at hand and file if needed. Technically the children don't need to file but maybe you will file their returns just for matching.

 

[Lion EA]

That's just good parenting, Catherine and Pacun.  Personal family expenses, incentives, gifts.

Years ago my son did some counselor-in-training work with his former summer camp, having been told no tax documents.  A 1099-MISC showed up.  We opened a Roth IRA for him immediately.  Years later, he's made use of it as they work on the bakery, Hancock NY:

http://www.thebakeryhancockny.com/online_orders/default.html

Order his wife's macaroons; they travel well.

[BulldogTom]

8 hours ago, Catherine said:

Good point, @Lion EA, and one I had not considered.  It is possible for kids to work younger than teens (think of child models, for example) but I have never looked at the rules.  When my girls were little and they worked for me, I paid them out of pocket and did not attempt payroll.  They got $1 for each 1/2" of paper stacked for shredding, and I would put the shredder in the living room and they would feed it during commercial breaks while they were watching their favorite shows (they each got one 1/2 hour show a day to watch, and were allowed to watch their sister's show as well).

I put my kids to work in my tax business at age 12.  They stood in front of my office an waved a sign.  The shredded papers for me as well, and generally did anything that I would have a "girl Friday" do.  They kept time cards on an excel spreadsheet.  Every penny they made from me went to their Roth IRAs.  I wanted them to have money to pull for college (that is why they started at age 12, so they held the account for 5 years and could pull the contributions if needed).  Oldest son did not have to touch his during college.  Youngest might have to, but it will be close.  They did not miss the money when they were kids, and they might thank me in 40 years when they see what their tax free IRA balance is at that time.

But I have no idea what the answer is to the original question.  I only opened the thread to see if someone had an answer.

Tom
Newark, CA

[Gail in Virginia]

Instead of filing a tax return, wouldn't the answer be to file a stand-alone 5329 for the kids to report the excess contributions since they never should have been made?  They would have to pay the tax for making the contributions, but then no tax for pulling them out and correcting the situation.  Or maybe I am looking at this wrong.