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MONEY-SMART KIDS
Roth IRA Rules for Kids
by Janet Bodnar

My 16-year-old son earned $2,200 in 2004. Is that the maximum he can contribute to a Roth IRA? Could I contribute an additional $2,200 on my son's behalf?

Opening a retirement account for your son is a big step in the right direction, but you've gotten a little off track. Let me set you straight.

For starters, the dollar limit on Roth IRA contributions for 2004 is $3,000 or 100% of earned income, whichever is less. If your son earned $2,200, that's the most he can deposit. You can't match his contribution, and you can't kick in an additional $800 to bring him up to the $3,000 maximum.

If your son has already spent his earnings, or if you expect him to pay for school expenses or save his money for college, what you can do is open a Roth IRA on his behalf and deposit up to $2,200 -- the maximum amount he can contribute. Uncle Sam doesn't care where the money comes from as long it doesn't exceed the amount of your son's earnings.

By the way, your son can open a Roth IRA for 2004 all the way up to April 15, 2005. And in 2005, the annual cap for Roth IRA contributions rises to $4,000 (it jumps again to $5,000 in 2008).

Hiring your children

I'm self-employed, with both an outside and a home office. What would be required (paperwork, taxes, etc.) to have my two sons -- an energetic 11-year-old and a lazier 13-year-old -- work for me? Could they open a Roth IRA with their earnings?

Yes, your sons could open a Roth IRA if they worked for you -- as long as they do real work and their earnings are legitimate.

To make sure you stay within the law, follow these guidelines:

• Hire your sons to do tasks that are suitable for their age and your business -- cleaning the office, answering the phone, opening mail or entering computer data would all be acceptable.



• Pay them a reasonable wage, and keep records of the work done, the number of hours worked and the hourly rate.



• Pay with a check drawn on a business account, and file a Form W-2 reporting the kids' earnings to the Social Security Administration.

A boon for you: Social security taxes aren't due on wages you pay to your own child under age 18, assuming your business is not incorporated.