Children who work as employees generally don't need to file a tax return unless their income exceeds the standard deduction amount, which is $5,700 in 2009 and in 2010.īut a child who has net earnings of $400 or more from self-employment must file a tax return to pay the 15.3% tax for Social Security and Medicare. It's doubtful that your grandchild will be on the hook for income taxes.
You'll have a stronger case if he or she also gets paid for cutting grass for other people.
Paying for lawn mowing will likely pass muster with the IRS, as long as you pay a reasonable wage. You need to be especially careful if you hire a grandchild to do odd jobs around your house. Things get more complex if kids work in less-formal jobs, such as babysitting or leaf raking. The proof is easy if the income is reported on a Form W-2 from an employer, such as a pizza place or car wash. In the unlikely event that the IRS questions the contributions, you should help your grandchild keep records of hours worked and wages received. Contributions to a Roth IRA can't exceed the child's earnings for the year, up to a maximum of $5,000 in 2009 and in 2010. "If your 10-year-old grandson opens a lemonade stand and clears $300 for the summer, the kid could keep the money and Grandma can tuck $300 in the Roth," Haug says. If you doubt that a youngster would see the wisdom of locking away his or her earnings for decades, don't worry. If the 10-year-old continues to contribute $500 until 59, he will have a nest egg of $233,308 at age 60. That compares with $97,084 for a Roth IRA owner who contributes $500 a year from the ages of 22 to 59. According to a study by Haug and co-author Adrienne Cichelli, a child who contributes $500 a year for just nine years from the ages of 10 to 18 will accumulate $111,982 by the time he reaches 60, assuming an average annual return of 7.2%. Indeed, those early contributions can pay off big time, says Mark Haug, a teaching fellow at the University of Kansas's business school. "Roth IRAs can be a fabulous tax-free growth opportunity for grandchildren because they are investing early and investing young," says James Lange, author of Retire Secure!: Pay Taxes Later (Wiley, $25). To help your grandkids build a nest egg with a Roth IRA, they need earned income, whether it's money from raking leaves or a stint as a lifeguard. Thanks to the power of compounded returns, she'll be thinking of you with great affection when she retires. She can put her earnings into the Roth - or she can keep the cash and you can make contributions for her.
Perhaps your 12-year-old granddaughter earns money babysitting for the neighbor's children.
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