college savings: 529 or Roth IRA owned by child?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Posts: 85
Joined: Sun Jun 17, 2012 2:14 pm

college savings: 529 or Roth IRA owned by child?

Post by TarHeel2002 » Mon Oct 30, 2017 3:11 pm

I was recently introduced to the idea that I could put my children on payroll at my small business to assist in simple chores (dusting the office space, taking out the trash, etc). Their earned income could be placed into a Roth IRA for future college expenses and/or a head start on retirement savings.

I have been steadily contributing to a a 529 account for my children up to this point. College is still 10+ years off. Child one has 36k in his 529. Child two has 18k in her 529. Given roughly equal annual future contributions to either the Roth IRA or the 529 ($5500)...which one is better? Roth IRA owned by the child or 529?

Thanks you!

Arthur Digby Sellers
Posts: 24
Joined: Wed Sep 14, 2016 2:51 pm

Re: college savings: 529 or Roth IRA owned by child?

Post by Arthur Digby Sellers » Mon Oct 30, 2017 4:09 pm

One caution with respect to putting your children on payroll. My understanding is that you can only legally pay family members for work that is actually productive to the business, and at a competitive rate. In other words, if your children dust the office and take out the trash, you could not legally pay them more than about what you would pay a legitimate employee who was assigned those tasks--maybe $10-15 per hour. So you could probably legally funnel $10-15 per week to your children's Roth IRA, assuming that the children actually do spend an hour a week on the tasks you assign. You are not legally entitled to pay your children an inflated rate to perform menial labor in order to reduce your (or their) tax bill.

User avatar
Posts: 3126
Joined: Wed Feb 19, 2014 10:11 am

Re: college savings: 529 or Roth IRA owned by child?

Post by DaftInvestor » Mon Oct 30, 2017 5:12 pm

Seems to me continuing 529 is much easier than dealing with setting them up with payroll/W2/taxable-income.
Also - with Roth they can take the money and do whatever they want - you can look at this as an advantage (can save for retirement if not all used for college) or a disadvantage (can skip college- take their money and blow it all in Vegas) versus 529 where you maintain control of the money.

teen persuasion
Posts: 361
Joined: Sun Oct 25, 2015 1:43 pm

Re: college savings: 529 or Roth IRA owned by child?

Post by teen persuasion » Mon Oct 30, 2017 6:48 pm

Have you looked at how each source of college $ would affect the FAFSA EFC calculation?

Roth withdrawals from the child's IRA would be included in the child's nontaxable income. After subtracting an income protection amount ($6k-ish), 50% of the child's income is added to the parents' EFC calculation.

529 accounts are included in available assets for parents. After subtracting an asset protection amount ($20k-ish), only 12% of assets are included in available assets. Then a progressive rate is applied to the available income + available assets (22% to 47%). The top rate of 47% * 12% gives a max rate of 5.64% of parental assets included in the EFC calculation.

Posts: 65
Joined: Wed Apr 12, 2017 8:04 pm
Location: DC

Re: college savings: 529 or Roth IRA owned by child?

Post by MarvinK » Mon Oct 30, 2017 6:57 pm

Hello TarHeel,
Research two items, as the previous poster pointed out:
Roth IRA owned by the child (FAFSA currently calculates at students contribution EFC, 20%, currently exempt on fafsa)
529 (Currently calculates at parents contribution rate EFC, 5.64%)
*Caveat FAFSA can change by the time they apply. You may want to consult a specialist to understand exemptions and what may happen in the future.

You may want to follow the Boost Act proposal to see if it passes. One proposal is a 529 to Roth rollover. ... ?id=830064

A side benefit to putting a young adult on the payroll is this:
Social Security. Each child that works would hit 40 quarters earlier. Those young years get a larger multiplier.
Also it does contribute to their 35 years average. For example, if like you they are entrepreneurs and want to retire early.....Then social security currently calculates 35 years of earnings. If they make it big early or need to take time off/career change (25-30 working years), then some of these young earning years (even low amounts), are much better than zero.

It's a good habit for them to learn about their Roth IRA.

For 529s, the contribution limits are much higher (current gift tax). If you had a bonanza year in your income in 2018, you could front load it, (put 5 years in) and have more time for compounding!

Either way (or both), tell the kids that they have skin in the game. They can contribute even small amounts (you can transfer it for them) into their college fund, from office cleaning, lawn mowing, babysitting, leaf raking, etc.

As also a child of two small business owners...we worked hard in the business, didn't get paid for a lot of little things, did get paid W-2 when I was older. Excellent experience. Very much valued college. And to the previous poster, I actually made money in a Vegas casino, while Mom was in a conference; I went back to the conference with a big grin on my face. I also have earlier Social Security eligibility than my peers. Best wishes to your business and kids.


Posts: 123
Joined: Sun Oct 09, 2011 11:07 am

Re: college savings: 529 or Roth IRA owned by child?

Post by kksmom » Mon Oct 30, 2017 8:49 pm

Re paying Medicare/FICA/FUTA taxes, depends on how your business is "structured" ... amily-help

Posts: 987
Joined: Tue Jul 15, 2014 3:26 pm

Re: college savings: 529 or Roth IRA owned by child?

Post by JGoneRiding » Tue Oct 31, 2017 12:07 pm

You would of course want to verify with your cpa. But it's my understanding that young children placed on parent owned business payroll don't get ssa credits bec you don't pay FICA on them. Also note fyi min wage laws and child labor laws don't apply to children working for their parents (child endangerment of course does so don't do anything stupid)

Post Reply