To me the larger benefit is psychology. Once money is invested in a 401k or IRA, it’s far more likely to stay invested. And you get used to never seeing the money.
It’s perfectly legal, you can give like $15k tax free to as many people as you want each year. So, for example, $15k to each of your three kids, every year. There’s a lifetime limit of 10 million bucks or something like that.
Didn’t know that. So I’m expected to report the $100 I win playing ~1 poker session/year but the IRS doesn’t care about taking a piece of a $5k gift?
Pretty much
Yeah I almost wrote something like this but left it out cause I didn’t want to get into all the terrible financial decisions I made in my 20’s. I was aware that I had a decent chunk of cash I could tap into if needed but cashing out an IRA felt like another level of degen I didn’t want to go to.
Yeah. There’s nothing illegal about that.
Where it gets dicey is where people give their kids jobs, pay them, and then get that money into a Roth. But even that is legal if done properly.
People on Bogleheads hire their kids as models starting at age 1 and max fund roths every year. Given drastic IRS budget cuts I doubt there’s much risk but I would never do it.
Well, if done properly, there is no need to fear an audit. The key is having some sort of business where you can legitimately use the photos. I know someone who has a blog that isn’t super well monetized that does this. He just inserts photos of his kids the way someone might use stock photos. He doesn’t even say that they’re his kids.
This is what happened to us. Kids early and debt up to our eyeballa preventing the ability to save in retirement accounts
There’s a huge amount to fear from an audit–this is all fraudulent. Paying a child to model for pictures is a gift, not earned income.
Sorry, that’s just untrue. I don’t know what you mean by “all fraudulent”. It’s clearly not. Whether it’s fraud or not depends on the execution.
Children are paid to be models all the time. You think the kids that do baby food commercials do it for free?
If,you would like to explain, I’d be happy to listen, but I think you’re just making this up.
Here is a specific scenario:
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Let’s say Jane has a small business which is a blog on which she provides reviews of children’s toys.
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In addition to the text of her reviews she has photos and video of kids demonstrating certain things about the toys.
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She pays the kids for posing for the photos.
So, are you saying
- She is not allowed to pay the kids.
- She is allowed to pay the kids only if they are not her kids.
- Something else
Probably 2
Note: While I should probably know if thats ok tax wise or not, I currently do not know.
You can pay your kids the arm’s length value of the service, but if the service is playing with toys, then the arm’s length value of the service is zero. If your kid poses for a professional photograph for your slick ad campaign, then you can pay the going rate for real child modelling work (and deduct it as a business expense). If they’re just playing with toys while you snap candids that you post on your blog, then you can still pay them the going rate (and deduct the expense), but the going rate is ~zero. If you pay more than ~zero, you are actually making a gift.
Also curious to know whether your friend is filing W-2s and paying employment taxes…
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The fraud is in the value being placed on the pictures, zero chance a small business would pay $18,000 for baby pictures as a legitimate business expense.
Pretty much just a low rent version of Donald Trump and other rich people’s scam of claiming a building is worth $100mm when applying for a loan and then saying it’s worthless when it comes time to pay the tax bill. Taking advantage of the subjectivity the law must allow so that the real world can actually function, and using it to defraud the government, banking that they would rather spend their time on lower hanging fruit.
So you’re telling me this whole thing hinges on whether he is a professional photographer or not? Once again, I think you’re just making that up.
He pays market rate (something between $50 and $100/ hr IIRC, but it has been several years). One of his kids was actually a model in a kids clothing catalog, so he just used the same rate.
I don’t know if they are W2 employees or independent contractors. If the former, I’m sure he does everything by the book with respect to withholding.
Seriously, bobman should probably quit talking about this tax stuff and get back to his day job.
You, as well as anyone, should know that regardless of what his day job may be, he is still required to make sense and support his assertions.
We’ve gone from his first post of “It’s all frauduent” to now “Well if he has a professional photographer, pays market rate, and files a proper W2, then it’s OK”
Only disagreement seems to be on the professional photographer part.
Well I think it all hinges not on if they guy hires a photographer, but rather if it’s just a scheme to generate earned income so that he can max out his toddler’s IRA. And if your friend is hiring his own child to pay his child remarkably close to $6,000/year, all of which ends up in the child’s Roth, then it’s probably just a scheme to generate earned income for the toddler so the toddler can max out his IRA. Whether or not there is a professional photographer involved.
Where are you getting $18000 from?
Max funding a Roth is only 6K? The guy I’m thinking about doesn’t even pay his kids that much. But he does get a good amount in there and it compounds for a for a very long time.
And all this for the very marginal benefit of putting money into a Roth IRA rather than just keep it in a taxable account. As you say upthread, taxes on investments are quite low. If the parent just puts $6,000 in mutual funds in a taxable account for the child every year they’re going to have a nice nest egg when they’re 18. No need to do the fraud.