Without much research, I had read it was good to open a Roth IRA for your children. I did it maybe 3 years ago for my two kids. They’re 7 and 4. In order to open the account, I think I had to put a minimum amount in, so I put $100 in each. Obviously I now realize children need an earned income to fund their IRA, so they shouldn’t have the $100. What do I do to fix this?
Posted by Ok_Courage_6766
3 Comments
Take it all out and pay the penalty.
Note: what financial sweat shop opened the account for the 3 year old without asking questions? KYC can forestall many future problems.
My favorite was the couple who came in February and said “we did this in September, was that ok?”
It is possible for children to earn income, even babies, through modeling opportunities. You just have to declare it on the parents’ tax returns. So if your children are ever model/act they can have a IRA account for any earned income. But if this doesn’t apply to your case, the much cheaper route is to withdraw and pay the penalty on the $100 for excess contributions of 6% each year on the $100.
Since you’re talking about toddlers who I assume have no other income and therefore no requirement to file taxes, and you’re talking about just $100 per child, I would withdraw the money now and then if you receive a bill from the IRS you should pay it, but I would not proactively do anything. This amount is on the edge of being immaterial, you probably haven’t earned any income from the deposits, and you’re correcting it by closing the accounts. I wouldn’t voluntarily take it any further but technically you may need to pay a 6% tax per year. Deal with that if the IRS asks for it.