31 Dec Can I open an IRA for my new grandchild?
Q. Can I open an IRA for my new grandchild? I have my own company so I was thinking I could pay her a salary so she has earned income. Will that run afoul of IRS rules?
— Still working
A. This could be a good idea for you, but you may need to wait until your grandchild gets a little older.
Hiring family members in your own business is a good idea, said Deva Panambur, a certified financial planner with Sarsi, LLC in West New York. and adjunct professor of personal finance at Montclair State University.
In fact, he said, the IRS website makes a mention hiring family members as an advantage of running your own business.
Of course, it is important that the family member — your grandchild in your case — be of employable age, be employed for an appropriate and legitimate role, and be paid a reasonable salary, Panambur said.
“In particular, the employment should conform to all labor and local laws,” he said. “You mention ‘new grandchild’ so I am not sure if you mean a newborn, which would of course not be legally employable for most jobs, except for things like modeling roles in appropriate advertising.”
If you follow all the rules and regulations, then employing your grandchild could be a great strategy for your business and for your grandchild, he said. Your business can get deductions for the salary paid, and your grandchild will probably pay very little or no income tax because the standard deduction for a single filer is $12,400 in 2020.
“You could open a Roth IRA for your grandchild into which you can contribute the lesser of $6,000 or the actual earned income every year,” Panambur said. “The contributions in a Roth IRA grow tax free and withdrawals are not taxed.”
Alternately, you can open and fund a traditional IRA, into which you could contribute the lesser of $6,000 or actual earned income, he said. However, considering the low income tax rate that the grandchild is likely to be in, a Roth IRA is a better option, he said.
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This story was originally published on Dec. 31, 2019.
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