Funding ROTH IRAs for young children

Dear Dave,

I have three children and I would like to fund ROTH IRAs for them. My question is, since they have to literally earn an income in order for me to do this for them, what legitimate sources of income can they have? They are 5, 7 and 9-years old.


Marion, Ind.

Dear Barclay,

You are right by saying that they have to literally earn an income for you to legally be able to fund a ROTH for them. Honestly, you may have a tough time justifying the 5 and the 7-year-old to the IRS. I have a 10-year-old that has worked at my office enough that I have been able to pay him, and by the time my kids are teen-agers they work at my office every summer. That is not an option.

We’ve funded ROTH IRAs for the teen-agers for the last couple of years as a result. I have to file a tax return on them and there is a lot of paperwork involved in that process. If you are self-employed you can go that route. If not, you can start a small business of some kind and hire them to work. You have to pay them a market rate while you are doing this. It would have to survive an audit if there were one. I can’t pay my kids $30 an hour for stuffing envelopes, for example. And you want to keep everything honest. I don’t know how you would do that with the 5-year-old, or even the 7-year-old for that matter. That would be pushing it a little.

I did run into a situation once where a baby was doing some modeling in diapers. The parents made sure that they got that money over a couple of years so that they could fund the ROTH for a couple of years as well, because that was actual earned income for that baby.
So, I like your thought process here. You are trying to start saving very early for your children’s future, that is very commendable. Just be very careful with how you do it. Keep everything fair and honest, and you will be setting your children up for success.


Re-qualify for a better interest rate

Dear Dave,

My husband and I have two small children. We have a home and the interest rate on our home is (hang on to your socks) 11 percent, and it is on a 30-year balloon. I know that the big talk right now is refinancing. In our situation, over the last few years, since the births of our children, we have gotten behind on payments, made some late payments and had some general financial problems. But now our income is greater and we’ve seen the light at the end of the tunnel, so to speak. I was wondering at what point would we be able to try and refinance this house at a better rate? I know we may not look good on paper right now, but we hope to very soon. And would it be better to try a local mortgage company for the refinance? Please advise.


Austin, Texas

Dear Sonya,

Two to three years of on-time or early payments. That’s what it will take before you can refinance this loan. You will probably not be able to qualify for what’s called a “standard” or “conforming” mortgage until you’ve had two years of clean credit and a good explanation as to why the bad credit will not come back. What I mean by that is you will have to have a steady job history as well as the on-time payments, etc.

As for using a local company, there are certain guidelines by which all mortgage lenders have to adhere to. Those are the Fannie Mae, FHA or VA guidelines. All of those loans are going to look the same no matter where you get them. That is just how they are set up according to those guidelines.

What you might get someone to do locally, with a local credit union for example, is to make you a 15-year fixed at a better rate based on your story of the better job, better income and credit problems being in the past. A local provider will be holding that loan in-house so to speak, so it is not a traditional mortgage. You will basically have to sell them on the fact that your credit mess is in the past. It will still be slightly higher than a traditional mortgage, but you might beat that 11%. It is certainly worth looking into in your case.



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