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Kiddie ROTH IRA for Foster Children?

 
 
Reply Sun 13 Apr, 2014 10:40 pm
I live in California and currently foster two young siblings in Los Angeles County. As part of the foster care program, I receive a monthly subsidy that is used towards the cost of their care. (These payments are not included in my taxable income.)

I am fortunate enough to be able to pay for most of their care (food, clothes, material needs) with my personal income through work, without great need to use the subsidy to cover basic necessities.

I have already opened savings accounts and 529 plans for the children, but I would like to do more to invest in their future.

MY QUESTION IS THIS:
Can state foster care subsidies be used to open "Kiddie ROTH" IRAs for the children?

I understand that the child's earned income must be used as the basis for funding of the "Kiddie ROTH", but was wondering if there is any precedence for their state subsidy being used towards the contribution?

Any guidance you have to offer would be much appreciated.


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roger
 
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Reply Sun 13 Apr, 2014 11:34 pm
@FosterMom626,
My guess is that 'earned income' would have been subjected to both payroll and income tax withholding. By that standard, untaxed income to you would not be allowed as earned income to the children.

I've never seen this situation before, but I am kind of familiar with the reasoning. Is there any possibility of setting up some sort of trust to which you can make periodic contributions?
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Peter Frouman
 
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Reply Mon 14 Apr, 2014 12:28 pm
@FosterMom626,
You should consult a tax professional to get a definitive answer but I'm fairly certain that foster care subsidy payments would not count as a child's earned income.

See http://www.irs.gov/Individuals/What-is-Earned-Income%3F

One way to get them earned income might be to pay them to do household chores or something. However, depending on how much tax (including self-employment tax) they have to pay on that income, doing this solely for the purpose of getting them enough earned income to qualify to make an IRA contribution may not make sense.
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