Thanks, I appreciate the heads up. I will research once I see how they pay him.
I think there was a recent thread about that subject. Not sure I can find it.
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Annoyingly (to me, at least) your sonâs fellowship/research stipend will be considered unearned income and therefore not eligible to be contributed to a Roth (or any other IRA). The annoying part is that this unearned income is taxed at your marginal rate under the Kiddie Tax rules.
When my son has received these payments, there has been no mention of tax. A single check arrived for the full summer, and it looked like an expense reimbursement checkânot a paycheck.
The following January, the 1099-MISC arrived with Box 3 (Other Income) filled in for the full amount of the stipend.
@1214mom â You may be thinking about the change that impacted grad & PhD students as part of the SECURE Act. This began with the 2020 tax year.
"Another change affecting contributions is including non-tuition fellowship and stipend payments as compensation in order to calculate how much compensation was earned for IRA contribution purposes. Prior to the tax law change, stipends and non-tuition fellowship payments received by graduate and postdoctoral students were not treated as compensation and could not be used as the basis for IRA contributions.
Effective for tax years beginning after December 31, 2019, the new rules state that an amount includible in income and paid to them to aid the individual in the pursuit of graduate or postdoctoral study (such as fellowship, stipend, or similar amount) is treated as compensation for purposes of IRA contributions. Therefore, non-tuition fellowship and stipend income when included in taxable income now counts as compensation in order to make an IRA (both traditional and Roth) contribution. This allows those graduate and post-doctoral students to save more for their retirement than in the past."
Thanks. Uggggggh.
The more I read in different places, the more confused I get. Itâs aggravating. They have specifically told him heâs not an employee of theirs (obviously) but he is receiving compensation for work performed. I guess in the end heâs an âindependent contractorâ. Iâll have him ask how they have reported these payments in the past (1099 misc?) so hopefully we can be prepared for any tax implications.
Iâm not sure if this question was addressed/discussed (sorry if I missed) - does anyone have a recommendation for a company at which to open up a small retirement account for my 19 yo D? I just want to (as others have said) help her see the value in saving for retirement early (even though she still in college).
Weâll throw in a few hundred $ to start, with the hope of adding to it and having her put in some money through the years. Just want minimal fees and the ability to track it onlineâŠ
My DC set up their retirement account through our Merrill Lynch guy. They started at 19 with $1000 and puts $50/mo in (they have had a part time job since high school and thru college). DC also started an investment account there too with the minimum $5,000 required. I donât know much about the details but basically DC pays no fees because she got âinâ thru us.
DC2 is 20 and just opened an investment account too. (Spouse had showed them a chart of how much $5000 is worth in X years.) A little nerve wracking for them because that is most of their money, but will replenish the savings account with their summer jobs.
While I think we did well over the years teaching them abut spending and saving in general, I think it is great they are more recently learning early about retirement and investing (I wish I had at that age!) I give spouse all the credit (not something I do often 
).
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I set up an IRA for my son when he had his first job with Vanguard. Once he graduated college, I gave him the login info and he changed the password so its totally under his control now.
His 401(k) is with Fidelity. So now all of his investments are through them. Easier for him to track. Still has Vanguard account. Will just let that grow.
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Any of the large brokerage firms are fine, but after using Fidelity, Schwab & Vanguard, I prefer Fidelity. Schwabâs research is excellent, but I do not like their on-screen format as much. Fidelity also seems to offer more hours of phone support than Schwab, including very late night. Personal preference only! I do not know about minimum balance requirements but my boys opened their Roths with a few thousand from summer earnings. No fees.
One son had his Roth IRA at Vanguard, and we both stared at the screen for ten minutes attempting to figure out how to contribute money using a checking account that had been previously linked. I imagine that if we were regular Vanguard users we would not have struggled for ten minutes, but he decided to move to Fidelity after that.
If your son is opening a Roth, have him pull down the Form 5498 each year. Good to have to establish basis, in case he ever moves the account elsewhere in the future.
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I agree with you 100% about the aggravation.
I went around in circles on this, and the answer can vary depending on how the earnings are reported on the 1099âspecifically which boxes are filled in. Universities seem to wash their hands of the entire topic and suggest one consult oneâs own tax accountant. Hello!!! They are 20 years old and donât have tax accountants! And the university awards MANY research fellowships each year so they should offer an opinion on tax treatment.
A true 1099 employee would be required to pay both the employer and employee share of FICA, so 2 @ 7.65%, or 15.3% right off the top, but my read is that FICA is not required but Kiddie Tax is.
Also, while on the topic of student taxes (which really is far afield from âHow much do we need to retire?â), when students work for the university during the school year, the school is not required to withhold FICA from the student employee or remit same on behalf of the employee, so your child will see that his gross pay and net are the same.
Good luck.
She isnât under any kiddie tax in any case because sheâs not a dependent, so that takes care of that. I guess I need to look more thoroughly through all the documentation they sent to see what the rules are for transferring and such as far as then transferring to an IRA and then converting that to her Roth which is definitely the thing to do because with her standard deduction and an investment property she owns, she will likely be in the lowest bracket or even 0 bracket so it is 100% worth doing and converting. But again, the time involved can be a hassle when she can just put $6,000 into her Roth and call it a day.
Yes, the nice thing about a 401k is that the contribution limit is $19,500 (more if youâre over 50) and then an employer can match up to 25% of your income. She just received the 401k info yesterday but has already received one large paycheck, so she wonât be able to shove all her income in but Iâll have to discuss with her the options if she chooses to or not. They keep sending her benefits information, but I guess since sheâs remote thatâs why itâs all coming so late.
@1214mom She is not getting a stipend, but I do believe the tax law changed a few years ago in that stipends now are taxable. @MarylandJOE If heâs actually an independent contractor, as opposed to receiving a stipend then he will be able to open a Roth IRA, however, you need to be careful about the contribution amount because it is not the same as he will be paid, since he will be picking up his share of self employment taxes, so it is actually less than the amount he receives. You can also put in the full amount he receives then when his taxes are done you can just pay a penalty, or withdraw the excess amount. This happened to us last year because I forgot about the reduction for self employment taxes. However, we left the money there because the penalty was so nominal and we were already receiving the tax free benefit with the account having been up significantly since we deposited the money.
@Jolynne_Smyth Our favorite company for these things is Vanguard. Our favorite funds if you donât want to invest in stocks there are VFINX or VOO which are both S&P 500 funds. One is an Index Fund and one is an ETF. You donât need to have your own broker to do this, theyâll take their own cut. With Vanguard you can also use their own people and theyâre amazing. They also have no trading fees when you buy/sell stock. My kids also have accounts through Fidelity but those are just for stocks and the app is better than Vanguard. Fidelity is good for trading and such, but their website and app is not the greatest and finding information can be confusing. The cost basis info is much better at Vanguard. I also hold a lot of my own stuff at Etrade which is not where my stuff started, but after 4 companies being bought itâs where my stuff has landed as Etrade was the last company to buy out the last one my stuff was at. So, I stayed and I like their setup, but I donât use any of their personal people. If I have questions, I always defer to Vanguard or other personal financial people.
Re: starter retirement accounts, last year I set up a custodial Roth for my then 16 year old. I wanted to do it at a place I had accounts already, but make it so kiddo couldnât see my accounts when he logged in. I wanted him to be responsible for making contributions and be able to check his investments. Sounded reasonable to me. No one was able to do that. The hang up was him not being able to see my other accounts with a separate login. I ended up with Vanguard, it is linked to my checking account for contributions, and he canât look at it on his own. When he turns 18, I will change it to a non-custodial account and he is on his own.
Fidelity can do this
I should add that my kids didnât bother to set up separate accounts but they can each see one anotherâs and theyâre pretty competitive with how well theyâre doing in the stock market. Itâs pretty funny.
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Are you sure? I have an account at Fidelity, so I checked them out, and there was some reason why it wouldnât work the way I wanted. Donât remember what. Thatâs great though
Yes, they sent me the info for mine to separate it out when I called and asked, but they didnât care ultimately so didnât. There are forms to sign, etc and create their own logins, but yes.
I agree that being familiar helps. I have had my own Vanguard IRAs and other investment accounts for almost 3 decades. Canât remember when I went online but have been doing so for a long time with them. Transfer money amongst VG accounts and checking account regularly. Very easy for me at this point. But very used to it now as well.
Also, my oldest who has his own IRA now at Vanguard, but weâve never gotten rid of the UTMA accounts, when he logs in under his account, he can see the UTMA accounts and his accounts. So thatâs another way you can do it. Have your kids open their own Vanguard account where theyâre not UTMA accounts. They can then not do anything with the UTMA, but they can see them. Yes, my son canât do anything with his UTMAs technically, even though heâs 24, but he knows he can if he wanted, he just doesnât care enough to have me convert them to him and has me make certain transactions when I gift him money, so to him itâs easier for me to have access. This son of mine is an anomaly. Is a minimalist. But wants his money invested, lol. Heâll wind up being the billionaire in our family, no doubt.
I agree that she would not be subject to Kiddie Tax as that only arises with unearned income, but how is she not a dependent as a 20 year old college student?
If the plan her employer is offering is a Roth 401K and not a traditional 401K, and if she wants to contribute more than the $6K limit of an individual Roth IRA, then the employer plan will allow her that option. If she does not plan to contribute more than $6K this year, then I agree it would be pointless to jump through the hoops of transferring the funds out of the employer plan.
I would recommend everyone go online regularly and check their accounts. I am thinking about moving an old IRA of mine that I has just been sitting at a company in their fund since I opened it in 1990 ish with a few additions and have never touched again, to a financial advisor. I log in every few months. I wanted to check to see how itâs done this year, even though I knew from my spreadsheet I keep, but I wanted to look at the statements. I was locked out of the account which was odd and it said I had to call. They started questioning me asking if I had tried to add a bank account. Since I knew I never add money to this IRA and Iâm not old enough to distribute it, I definitely didnât try to add any bank account. But the woman was so evasive, I finally got pushy. Long story short, someone (this is creepy) was actually logged into my account and it wasnât me. 3x they tried to add a bank account. Confirmed it was not one of my accounts because it was a bank I donât bank at. It really unnerved me. We agreed they were going to disable my online access at this time. They were going to investigate. Check IP addresses, etc. Would let me know what that shows ultimately, etc. But wow, it made me run and check every account I have which I do somewhat regularly, but some like that I donât as I just tend to look up the price online if I know how many shares I have. I know this was discussed here about two factor authentication, but this company doesnât have it, and I always found it so annoying, but now, so happy some have it. Am also now planning to change my passwords and/or user names every where. This password thankfully is an old one that I donât use anywhere else. But it might be a user name I use elsewhere. Ugh so creepy.
The company btw if Franklin Templeton and they do not use two factor.
So everyone should check their assets regularly.
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Love it! These kids are just so fascinating. My kid is terrified to have control over his own money, doesnât trust himself with it, but is amazingly frugal. He insists on socking away half of everything he earns, which isnât much. I did not have the restraint he does as a teen. He hasnât gotten into investing yet (feels it is too risky for someone like him), so he is in an index fund. I also picked a couple of stocks for him to follow, companies he is interested in IRL, just to make it interesting.
Funny aside, I was looking for a target date retirement fund for him last year - and they donât yet go out that far yet! Made me feel so ahead of the game.