/ kiddie tax

How can children invest tax free

In this post, you will learn

  • How much can you give your kids every year without the gift tax
  • How can a minor invest tax free
  • What are the rules regarding the tax income for your kids:

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Investment options:

Let's say you have a child under 10 years old. Here are the tax-free investments options:

  • 529 plans
    • This will be tax-free until the child needs to use it for college-related expenses. The definition of expenses is very loose and even brother, cousin and yourself can use it.
  • Taxable account (custodial account)
    • This will be tax free as long as you don't hit the Kiddie tax (2100$ for 2016)

What is the Kiddie tax:

Back in the 80s, Congress passed a law to avoid parents shifting their investment to their kids in order to save on taxes. Therefore the current rules are the following :

  • Any income over 2100$ (2016) will be taxed at parents marginal tax rate (highest dollar amount)

Contribution to Roth IRA

You children is allowed to contribute to a Roth IRA as long as he earned income (not unearned income like stocks or dividend). He/she can contribute up to the limit of 5500$ per year. In fact, the contribute to either a Roth IRA or a Traditional IRA. This decision can be optimized based on how much the parent is earning.

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