Roth IRA for Kids

If you have a teenage child who works, consider encouraging the child to use some of the earnings for Roth IRA contributions. All that’s required to make a Roth IRA contribution is having some earned income for the year.
Age is completely irrelevant. Specifically, for both the 2014 and 2015 tax years, your child can contribute the lesser of:

(1) earned income or (2) $5,500.
Modest Contributions at an Early Age Can Amount to Big Bucks by Retirement Age
By making Roth IRA contributions for just a few years, your child can potentially accumulate quite a bit of money by retirement age. Realistically, however, most kids won’t be willing to contribute the $5,500 annual maximum even when they have enough earnings to do so. Be satisfied if you can convince your child to contribute at least a meaningful amount each year. Here’s what could happen, if a 15-year-old makes the following Roth IRA contributions starting now:
 $1,000 at the End of Each Year for Four Years. Assuming a 5% annual rate of return, the Roth IRA would be worth about $33,000 in 45 years when your “child” is 60 years old. If you assume a more optimistic 8% return, then the account would be worth about $104,000 in 45 years.
 $2,500 for Each of the Four Years. Assuming a 5% return, the Roth IRA would be worth about $82,000 in 45 years. Assuming an 8% return, the account value jumps to a whopping $259,000.
Why the Roth IRA Is Usually the Better IRA Option for Kids
For a child, contributing to a Roth IRA is usually a much better idea than contributing to a traditional IRA for several reasons. The child can withdraw all or part of the annual Roth IRA contributions—without any federal income tax or penalty—to pay for college or for any other reason. (However, Roth IRA earnings generally cannot be withdrawn tax-free before age 59½.) In contrast, if your child makes deductible contributions to a traditional IRA, any subsequent withdrawals must be reported as income on your child’s tax returns.
Advice: Even though a child can withdraw Roth IRA contributions without any adverse federal income tax consequences, the best strategy is to leave as much of the Roth IRA balance as possible untouched until retirement age in order to accumulate a larger federal-income-tax-free sum.

What about tax deductions for traditional IRA contributions? Isn’t that an advantage compared to Roth IRAs?
Good questions. There are no write-offs for Roth IRA contributions, but your child probably won’t get any meaningful write-offs from contributing to a traditional IRA either. That’s because an unmarried dependent child’s standard deduction will automatically shelter up to $6,200 of 2014 earned income from the federal
income tax ($6,300 for 2015). Any additional income will probably be taxed at very low rates. So, unless your child has enough taxable income to owe a significant amount of tax (not likely), the theoretical advantage of being able to deduct traditional IRA contributions is mostly or entirely worthless. Since that’s the only advantage a traditional IRA has over a Roth IRA, the Roth IRA option almost always comes out on top for kids.
Conclusion
Encouraging working kids to make Roth IRA contributions is a great way to introduce the ideas of saving money and investing for the future. Plus, there are tax advantages. It’s never too soon for children to learn about taxes and how to legally minimize or avoid them. Finally, if you can hire your child as an employee of your business, some additional tax advantages may be available.
Please contact us if you have questions or want more information about Roth IRAs for kids.

Abacoa CPA's

Jupiter, FL

(561) 331-0744

Back from Vegas with a lot of winnings and a W2-G? Here's what to do

If you’ve done some gambling, you may need to know about the applicable federal income tax rules. They can be summarized as follows.  You must report 100% of your wagering winnings on page 1 of Form 1040. They are subject to your regular federal income tax rate, which can be as high as 39.6%. If you itemize deductions, you can write off wagering losses on Schedule A of Form 1040. However, allowable wagering losses are limited to your winnings for the year, and any excess losses cannot be carried over to future years.
If you qualify as a professional gambler, your wagering winnings and losses are reported on Schedule C of Form 1040. However, deductions for wagering losses are limited to your winnings, and any excess wagering losses cannot be carried over to future years (same as for amateurs). The good news: you can also deduct travel expenses and other out-of-pocket costs of being a professional gambler.
In any case, you must adequately document wagering losses (and out-of-pocket nonwagering expenses if you are a pro) to keep the IRS happy. The government says you must compile the following information in a log or similar record:
1. The date and type of specific wager or wagering activity.
2. The name and address or location of the gambling establishment.
3. The names of other persons (if any) present with you at the gambling establishment (obviously this is not possible when the gambling occurs at a public venue such as a casino, race track, or bingo parlor).
4. The amount won or lost.
For example, the IRS says you can document income and losses from wagering on table games by recording the number of the table that you played and by keeping statements showing casino credit that was issued to you. For lotteries, your wins and losses can be documented by winning statements and unredeemed tickets.
You get the idea.
Last but not least, be aware that amounts you win may have to be reported to you on IRS Form W-2G (Certain Gambling Winnings). In some cases, federal income tax may have to be withheld too. Anytime a Form W-2G is issued to you, the IRS gets a copy. So the government will expect to see the winnings show up on your tax return.

If you feel like sharing your winnings with us or want to try and reduce your taxes use the contact page to set an appointment. 

Abacoa CPA's

Jupiter, FL

(561) 331-0744