If you’ve ever wondered “Should I, can I, open a Roth IRA for my child?”
Today I’m thrilled to share an exciting tax strategy with you today!
This strategy is for small business owners who also have children.
In this blog post, we’ll delve into the powerful concept of making your child a millionaire by opening a Roth IRA.
This financial move is not only available to business owners but also holds immense potential for securing your child’s financial future.
Get ready to unlock valuable insights, learn about the benefits of Roth IRAs, and discover how starting early can lead to significant wealth accumulation.
Understanding Roth IRA vs. Traditional IRA
To embark on this financial journey, it’s essential to grasp the key differences between Roth IRAs and traditional IRAs.
While traditional IRAs offer tax deductions upfront, the growth of the funds is subject to taxation upon withdrawal.
On the other hand, Roth IRAs don’t provide immediate tax deductions.
But the earnings grow tax-free over time, ensuring a fully non-taxable future.
The Power of Compound Interest and Starting Early
Compound interest is the secret sauce behind the remarkable growth potential of Roth IRAs.
By investing early, the money has more time to compound and grow exponentially.
Even small contributions made during childhood can lead to significant wealth accumulation by retirement age.
It’s crucial to emphasize that starting early is the key to maximizing the benefits of compound interest and setting your child up for a prosperous financial future.
Exploring the Numbers
Let’s put theory into practice and examine the potential outcomes.
Suppose you start contributing $6,500 annually to a Roth IRA on behalf of your child, who begins working for your family business at the age of nine.
Assuming an average annual return of 9%, this contribution, maintained for nine years until your child turns 18, would grow to nearly $5 million by the time they reach retirement age.
Yes, you read that right—$6,500 per year could translate into a multimillion-dollar nest egg!
Flexibility and Tax Advantages
One of the incredible aspects of a Roth IRA for your child is the flexibility it offers.
They can continue contributing to the account even after they start working independently, which allows for further wealth accumulation.
Additionally, since children often have a lower tax rate or even fall within the 0% tax bracket, they can contribute and withdraw funds from the Roth IRA completely tax-free.
It’s a remarkable opportunity to provide them with a solid financial foundation.
Taking Action with the Hiring Your Kids Toolkit
To ensure you navigate this process correctly and reap the maximum tax benefits, I’ve created the comprehensive Hiring Your Kids Toolkit.
This toolkit serves as your go-to resource, covering everything from legal considerations to effective tax planning strategies.
Visit JamieTrull.com/kids to access the toolkit and equip yourself with the tools needed to make informed decisions regarding your child’s financial future.
Harness the Power of Compound Interest
By opening a Roth IRA for your child and harnessing the power of compound interest, you can lay the foundation for their financial success.
If you want more information about the business and personal benefits of hiring your kids, check out our article “HOW TO HIRE YOUR KID IN A FAMILY BUSINESS: BUSTING MYTHS.“
Starting early, maximizing contributions, and taking advantage of the tax benefits can result in substantial wealth accumulation over time.
Remember, the journey to making your child a millionaire begins with informed decision-making and careful planning.
Don’t miss out on the Hiring Your Kids Toolkit, which provides comprehensive guidance on optimizing your child’s financial opportunities.
Visit https://jamietrull.com/kids and empower yourself to secure your child’s financial future.
Start early, make the most of compound interest, and unlock the potential to turn your child into a millionaire.
Together, let’s pave the way for their prosperous tomorrow.
The following is a direct transcript from the YouTube video and has not been edited. Please excuse any grammatical errors.
Hello. Hello everyone.
I’m Jamie Trull, your favorite CPA and profit strategist. And I am pumped about this video today. This video is gonna be a little bit different.
We’re talking about making your kid a millionaire, okay? Now we’re gonna be talking about some simple strategies that I am currently employing to help make my kid a millionaire down the line, down the line.
But I’m really excited about this strategy and I think it’s something that everyone should do specifically if you are a business owner.
Because as a business owner, you have an opportunity that other parents don’t necessarily have, and that opportunity is to employ your kids in your business and to open a Roth IRA for them that they can contribute to.
Exploring the Unique Strategy of Employing Your Kids and Opening a Roth IRA
Now, most of the time, minors cannot contribute to Roth IRAs unless they are working and making an income, which typically you can’t do at 10 years old.
But if you are working for a family business, it is completely legal and if somebody has earned income, they can contribute to a Roth IRA.
So what’s a Roth IRA versus say a traditional IRA? Traditional 401k, they differ in the way that they are taxed, okay?
So a traditional IRA or a traditional 401k, you are typically not going to pay taxes immediately.
You’re gonna get a tax deduction in the current year for any amount that you’re putting into that IRA. Alright?
So let’s say that you are putting $5,000 into that IRA. Well, you’re gonna also reduce your taxable income by that $5,000.
So a lot of business owners love this because it reduces the taxable income that they have to pay in the current year.
So a lot of business owners love that because it can help you reduce the taxes that you have to pay in the current year.
However, that money as it grows when you go to take it out, the growth of that money is going to be taxed.
Tax Benefits and Long-Term Growth
So that’s the important thing is that yes, you get a tax deduction upfront, but when you take that money out later, which will likely be quite a bit more right, because of the time value of money, you will be taxed on those earnings.
So that’s really important to know. Now, instead, when we’re talking about a Roth IRA, it’s actually very different.
Sure, you don’t get the deduction upfront.
There’s no additional tax deduction for amounts you put into the Roth IRA when you actually make the contributions.
However it grows tax free over time, you’re gonna have tax free earnings from now until when you take it out at retirement age. Okay?
So fully non-taxable. And remember, if we’re putting money in, the younger you are, the more that money is expected to grow and compound over time, right?
And therefore the more money you’re gonna have and make off of that. So it’s probably going to be exponentially what you originally put in.
Which is why Roth IRA is a fabulous choice for someone of A young age. It could be a good choice for anyone at any age, but especially if they are young age.
How Starting Early Can Transform Your Child’s Future
So let’s put some numbers to this because I truly believe in the power in numbers and being able to see it, I think is much more beneficial.
So I’m going to pull up here my Roth IRA calculator, aka, my Making Your Child a Millionaire Calculator. This calculator, by the way, is included in the Hiring Your Kids Toolkit. It is currently available.
Go check it out, https://jamietrull.com/kids.
And it’s got lots of resources, all the A to Z to hire your kids, get the best tax benefits, get everything legally done, correctly tracked well for the irs.
And this is included as well to show you the power of a Roth IRA and determine what you could do to help your child prepare for their financial future.
Calculating the Potential Millionaire Status of Your Child
So let’s jump on into it.
So let’s say we start with putting in expected earned wages for the year of whatever you expect to pay your child or whatever earned wages they’re going to get from other sources.
Again, you have to have earned wages in order to be able to contribute to a Roth IRA.
That is a requirement.
They will need a w2, some sort of proof of income in order to be able to qualify here.
So let’s say it was $8,000.
This, again, can be whatever you want here, but as long as it’s over the $6,500 Roth contribution limit, that means that they can contribute the full 6,500. Okay?
Now, importantly, it doesn’t need to be the same 6,500.
So if you’re paying your child to work in your business or they’re getting paid, you can actually make that contribution on their behalf.
You just can’t put more in it than they have actually made an earned income. So the limit is essentially either $6,500 or their total earned income, whichever is less, okay?
In this case, let’s say we plan to max it out just cause I wanna show you the true power and we’ll talk about where we go from here.
So now you wanna put in the current age.
In this case, my child is nine years old, and so I am hiring him at the age of nine to do some work in my business.
He’s doing some modeling work, he’s showing up on YouTube with me.
There’s some great videos about teaching your kids about financial literacy that you can go check out on this channel where he’s in it with me, but he’s getting paid for that.
I’m paying him via payroll for the work that he’s doing.
And so let’s say that I paid him the full amount, I put the Roth contribution of $6,500 in on his behalf.
And let’s say I plan to do that for the next nine years until he’s 18 years old. I do intend for him to be working in my business and he’ll be able to take on more and more tasks as time goes on.
The Power of Compound Interest:
Now, before I show you the results of this, we have to put in a expected rate of return.
Now, I know some people are going to argue with me on this, which is why I have support for the amounts that I’ve put in here because a lot of people have you say, oh, assume eight to 10% return.
They’re going to tell you that that’s impossible, that you can’t get eight to 10% returns.
But remember, we are investing for the long term.
So yes, over the short term, Is it easy to get kind of a guaranteed eight to 10% return? No.
But let’s look at history and what history says happens over time.
So I’ve actually pulled into this historical return chart, the last, oh say, a hundred years of the performance of the S&P 500.
So you can buy an index fund, that’s just the S&P 500 if you want to, and that could be all you invest in in this Roth IRA.
It doesn’t have to be anything complicated. In fact, I, I recommend simplifying it.
You don’t need to go pick stocks or anything like that.
Invest in the market either using an TF or an index fund.
Now, real quick, I know that I just told you what to do.
I am not an investment advisor, so disclaimer, but that is what we’re looking at here.
The power of just the S&P 500. Talk to a financial planner for more specific and tailored advice. Okay?
Securing Financial Independence
So back to it.
Now you’ll see here that yeah, when we look over a two year period, I mean the results are all over the place.
Like we’re talking about [inaudible] 37% down in 2009.
We all remember that we’re talking about 26% up in 2020, which was crazy and bizarre, and it’s still bouncing around.
When you look at year of year change, the two-year change, and even the five-year change is still pretty all over the place, right?
So yeah, it’s really hard to know.
But remember, if we’re investing into a Roth IRA for our kid, we are planning for that to be in for a long time, right?
It’s gonna be a long time before they are 65. So we need to probably be looking more towards the 30 and 40 year averages.
Well, when you take a look at those and you average those out over time, you can see that it really evens out. And we really do end up pretty much with eight to 10% returns over the long term.
So remember, when you’re investing over the long term, we’re not talking about day trading or trying to pick individual stocks.
When you’re investing over the long term in a market index or something similar, then overall you’re going to have a more.
I won’t say guaranteed, but a more smooth return, at least based on history. Okay?
Harnessing the Potential: Maximizing Contributions and Choosing the Right Investments
So I think because of that, it’s fair to say, well, let’s assume a 9% return.
You can play around with this if you wanna, you know, be conservative and put 5% fine, but I put a 9% return in and this is just contributing.
Okay? Let’s just recap before I show you.
This is just contributing $6,500 over nine years and then stopping, not contributing a penny more after that point in time, okay?
This is just what’s being tributed while your kid is a kid working for you, okay?
They can continue to contribute if they want to and continue to have it exponentially increase, but just over those nine years, which means you’ll have put in $58,500, okay?
You’ve maxed out their IRA with them for nine years, that $58,500 when they retire at age 65 is now almost 5 million.
I know, I know. It’s crazy. It seems absolutely crazy.
But it is the power of compound interest, and it is the power of starting early.
Investing in the Future: The Role of Roth IRA in Building Generational Wealth
Even if we make little tweaks, let’s just, let’s, let’s change the age and say we don’t start this until they’re, you know, 16 and we contribute even if we contribute for the same nine years.
If you start at 16 and go till they’re 25, right? If they, if they contribute that same amount.
So we’re still contributing $58,000, $500, but we started later, right?
That just cut it in half. In half. So the power of starting early is critical.
Even if you wanted to, you know, again, play around. You can play around in here with the rates if you want to. Y
ou can see what you, what you want to put in here, but overall, a not so huge amount of money can turn into a massive amount of money.
Of course, of course, right?
That money, 5 million when your child is 65, 50 years from now, let’s say, is not gonna be worth the exact same as it is today, but it’s still gonna be a lot of money.
It’s no small amount of money, okay? And it’s gonna set them up for a financial future that you could only have dreamed about.
So let’s say that that $6,500 isn’t gonna work out.
So okay, we’re gonna change this around maybe what if I put $3,000? Maybe you’re not paying them $6,500 in a full year, so maybe we max it out at 3000.
Is it still worth it?
So again, $3,000 starting at age nine. Going to age 18 is still gonna be 2.2 million at a 9% return average.
It’s a lot of money. It’s a lot of money.
Tax-Free Growth and Withdrawals: Unleashing the Full Potential of a Custodial Roth IRA
So I want you to really think about this.
And really think about how we could turn that’s, that’s now in this case, $27,000 that’s turned into 2.2 million.
So starting early, even if it’s small amounts. Whatever you can put into it.
Or whatever your child can put into it.
Depending on who’s gonna be doing it, getting a custodial Roth IRA account for them is gonna be huge.
And remember, this is all tax free. And the great thing is too, that for us, if you or I were to contribute to a Roth IRA, we don’t get a tax deduction or anything.
Technically we’re sort of getting taxed on it already on the money that we’re putting in because we don’t get that deduction and we have a tax rate.
But your kid is likely gonna have a 0% or very close to 0% tax rate. Meaning they get to put the money in tax free. And they get to take it out after it grows tax free.
There’s never any taxes for them. Like what? So there are other vehicles, right? For saving for your kids. We have a 529 plan as well to save for college expenses or higher education for our children. Those are great vehicles too. But this one is my favorite.
If you can contribute to a Roth IRA, if your child has any kind of earned income right then I highly, highly, highly recommend starting a Roth IRA for them. I had one opened when I was 17 years old. I went and opened it myself with the money that I had saved up.
Not a ton, but some. And I continued to contribute to it for a long period of time. And that money has grown to exponential amounts of just what’s sitting in my Roth IRA. That I will be able to take out when I retire tax free.
I still have a long time to go for that to continue to double. Okay?
Exploring the Unique Strategy of Employing Your Kids and Opening a Roth IRA
So at these rates, hopefully the goal is to double your money every seven to 10 years. And just think about the compounding of that.
If you start early, the one thing you take away from this is start early. So I hope that this was exciting for you. I hope you found it informative. If you wanna have your kid watch it, your teenager, your adolescent, watch this. And see the power of compound interest.
I highly recommend that. Maybe they’ll get more excited to help you and work in your business with you and make some money themselves. But definitely check out the full Hiring Your Kids Toolkit.
The Hiring Your Kids Toolkit: A Comprehensive Resource for Business Owners and Parents
If this is something you wanna do, but you wanna make sure you do it right. You don’t want the tax man after you, you wanna get the best tax savings because there are some things to keep in mind.
A lot of people leave a lot of taxes on the table.
We’re so excited to have it out there in the world. I definitely recommend going and checking out our other content on this. I’ve done a couple other videos this month actually, on hiring your kids.
So go check those out and I will see you next time. Thanks so much for joining me.