A company (incorporated) offers its employees a simple IRA with match. It comes out that the company is maxing out IRAs for the owner's children, the children do not work for the company and have no vested interest. Can they do this?
I think David Bach's Smart Couples Finish Rich actually recommends this? It talks about putting your minor children on your payroll doing some general chores and then doing the IRA for them. I have no idea the legality---couldn't they be possible doing some consulting or something and get paid that way?
Well, according to the irs, that would be illegal.
Who is eligible to participate in a SIMPLE IRA plan? Generally, any employee who has received at least $5,000 in compensation from you during any 2 preceding calendar years, and is expected to receive at least $5,000 in compensation in the current calendar year.
$5K isn't that much money. Are you sure they aren't on the payroll? I've seen some shady payroll stuff before - like the owner's wife who was in another country was on our payroll for $250K as an "analyst."
I have known people who put their kids on the books to get them to 5k in income for this or a roth. Some do have their kids do some level or work and some don't. I would consider it unethical and assume illegal but I don't know for sure.
I have known people who put their kids on the books to get them to 5k in income for this or a roth. Some do have their kids do some level or work and some don't. I would consider it unethical and assume illegal but I don't know for sure.
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My parents' accountant actually recommended this when we were kids. He suggested we file paperwork, make copies, etc. to get a small salary and put 2k (the limit back then) into an IRA (no Roth at the time).
A company (incorporated) offers its employees a simple IRA with match. It comes out that the company is maxing out IRAs for the owner's children, the children do not work for the company and have no vested interest. Can they do this?
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With this in mind, not legal. If they do any work for the company, legal.
Post by explorer2001 on Dec 24, 2012 0:18:12 GMT -5
Yes it's legal if the kids are actually doing something. They could be doing something simple like filing or taking out the trash or weeding the landscaping at the office. It doesn't have to be "professional" work like other employees are doing, just reasonable compensation for the work they are actually doing. Now if the kids never do anything or have anything to do with the office - then there's a problem. Otherwise as odd as it may seem it is legal and really good planning on the parents' part.
How does OP know that the kids don't work for the company?
They could be helping with thing remotely, doing something on weekends or attending networking events in the name of marketing.
I used to do something similar for the company my dad owned. We did it 100% legit, but other than maybe once a year when I would fill in to answer phones, I doubt any of his employees knew I was doin any work (I set-up and maintained an Access database for them) because I did everything from my home or on evenings/weekends.
One question that comes to mind is whether the company would have to pay payroll taxes etc. if the kids are on the books.
If we're talking about a closely-held company and all of the owners (assuming that there is more than one) are aware of what's going on, I don't see this as an ethical question at all. If it is legal, it is fine. If there are shareholders and such, I'd think funneling money out of the organization to pay for kids' fake jobs is shady and perhaps a breach of fiduciary duty.
ETA: another issue that comes to mind is whether kids would need working papers and whether they could do this when they're too young to work legally. Probably not?
Thanks everyone. A friend was asking me about this. The company they work for doesn't have enough money to pay a bond, and friend said it's because they are spending money on things they shouldn't. This was the only questionable item. The kids are grown and don't live close to the business, but it is possible they do stuff off site. I will tell friend what I learned.