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Investing Strategies to Help Grandkids

Last update on: Aug 10 2020
Estate Planning

Summer is filled with tax-advantaged ways to provide financial help for grandkids who are old enough to work. The Estate Planning strategies also work during other periods when the youngsters work.

Some of the estate planning strategies are useful only if you own a business, but first here’s one that everyone can use.

You can supplement the income a grandchild earns from a job by making a matching contribution to a Roth IRA in the grandchild’s name. Total IRA contributions on behalf of the grandchild for a year can be up to the lower of the child’s earned gross income for the year and $5,500. Your contributions plus any made by the grandchild or someone else on his behalf all count toward the limit. Any contributions you make from your estate planning funds on behalf of the grandchild should be free of gift taxes thanks to the $14,000 annual gift tax exclusion.

The benefits of a Roth IRA, especially one started at a young age, are substantial. The earnings of the account compound free of taxes as long as they remain in the IRA. After age 59½ all distributions are free of income taxes. The grandchild won’t be forced to begin required minimum distributions at any time, so the account can compound for as long as he or she wants.

There also are advantages if the grandchild wants or needs the money before 59½. The contributions can be withdrawn at any time free of income taxes. So, after a few years when income and gains have compounded to a decent amount, the grandchild can withdraw the some or all of the contributions and still leave the remaining income and gains to compound for the future.

In addition, when the grandchild is ready to purchase a first home, the contributions plus up to $10,000 of income and gains can be withdrawn tax free.

When you own a business, there are tax advantages to hiring a grandchild or child.

No matter who employs a grandchild, he or she  avoids federal income tax withholding if no income taxes were owed last year and none are expected to be owed this year. When the youngster is a dependent on someone else’s return, earnings are tax free when total income is no more than $6,200 and unearned (investment) income is no more than $350. When unearned income is more than $350, total income must be no more than $1,000 to avoid income taxes.

Of course, you deduct the wages and other payments when you pay a grandchild reasonable compensation for the work done.

When a child is employed by the business of one or both parents, no FICA taxes are due when the child is under age 18 and the business is either a sole proprietorship, a husband and wife partnership owned by the parents, or an LLC that elects to be disregarded for tax purposes. Federal unemployment tax isn’t owed on children’s salaries until they are age 21.

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