Parts of this article were originally written in 2019. It has been greatly reworked for January 2024. To learn more about Roth IRAs for kids, visit my Kid Roth IRA article on KidWealth.com
Five years ago, I started a Roth IRA for my kids to jump-start their retirement savings. It is very aggressive for a five and 6-year-old. I believe you can never start too early. The more time for compound interest to do its work, the better.
It’s not easy to start a Roth IRA for a kid. The IRS has an annoying rule that the kids have to have earned income to contribute to an IRA. At the same time, pesky labor laws are rude and limit the work a kid can do. How do you find work that a kid can do to earn income?
It’s a shame that my baby modeling idea never took off. Similarly, no one lined up to purchase their wonderful Pokemon art creations. Their YouTube channel has been a complete flop – they just aren’t interested in creating content.
Kid Roth IRAs with a Side Hustle
So, how do they earn this money to comply with the IRS’s demands for funding a Roth IRA? I pay them to help with my dog boarding business. In pre-COVID years, I was making around $15,000 a year. That was a nice side hustle while I was freelancing from home and writing this blog. During COVID, no one traveled, so there weren’t any dogs to board. However, everyone got dogs and vaccines. Then, they went back to work and caught up on travel. My dog business brings in closer to $50,000 a year now.
I’m now entering my ninth year boarding dogs. My kids have grown up with the experience of living with over five hundred different dogs. I tell my kids that very few people have that kind of experience at any age.
At a young age, my kids were naturally curious about feeding dogs. They saw me measuring food and separating the dogs to prevent food squabbles. It wasn’t long before they were helping me separate the dogs by distracting some of them while I brought another to a closed room.
The kids love to play fetch with the dogs. Who wouldn’t? It’s very helpful because the dogs get lots of exercise and then lie around for a few hours.
I’ve taught the kids how to pick up the dog poop. (That’s still a work in progress.) Some of their peers do the chore for allowance. However, for the family dog-sitting business, it’s a core aspect of the job.
Most of the dog sitting job is feeding dogs, playing with dogs, keeping the water bowl filled, and picking up after them. It’s the perfect way for a kid to earn money.
It’s only fair that I give my kids some money for the work they do. The IRS should have no issue with me doing that.
The only question I had was, “What’s a fair price to pay them?” I started by looking at what a professional pooper scooper company costs. It seemed like it would be several thousand a year with the number of dogs we have. My kids aren’t professional pooper scoopers, but the service doesn’t fill the water bowls or play with the dogs. They also aren’t available on call to help with a dog at almost any time.
There’s another way to value their contribution. I could pay them a percentage of the profits. I do all of the booking and managing. I do the meet and greets with new clients. I maintain the website and Rover.com profile. When people trust their dogs in our house, they are really trusting me. Realistically, they aren’t leaving their dogs in the care of two kids, right?
I started off paying them fairly little – about $500 the first year. However, they’ve grown to do more and more. I pay them around 8% of the revenue now. That seems kind of low now that I do the math. However, I want to be cautious. I want to be able to show the IRS that this is all within their guidelines.
Kid Roth IRAs: Powerful Stuff
Contributing to a Roth IRA at a young age is very, very powerful. I started paying them when they were five and six. That money has 60 years of compounding until they reach ages 65 and 66. My kids ended 2023 at ages 10 and 11 and have had five years of contributions.
Before we get to my kids’ Roth IRA numbers, here’s a great CNBC video about Roth IRAs in general. Who wouldn’t want 3.4 million in one of their accounts?
My kids won’t have 3.4 million any time soon. Let’s presume that they earn 8% interest over 63 years. I’m using 63 because it makes the numbers work out well. Also, the retirement age will likely be between 68 and 70 for their generation. Using the rule of 72, their money will double every nine years. That’s seven doubles (63 divided by 9 is almost 7.) So, one thousand dollars becomes $128,000. There’s a lot of inflation involved, so $128,000 won’t buy nearly as much in 63 years, but it should still be enough to live well on. It should still be worth more than $100,000 in today’s dollars.
Essentially, $1000 now could reasonably be worth $100,000 in their retirement.
My Kids Roth IRA Numbers
I started my youngest son at $400 and my older one at $600. Since they are a year apart, I only have to keep track of the older one and match the younger one to the older one’s previous year. I’ve gone from $600 to $750, to $900, to $1200, to $1600, to $2000.
There’s only one problem. So far, the investments haven’t paid off. I had diversified their accounts with some foreign funds that haven’t done well. I also put some of their money in Vanguard’s small-cap ETF (Ticker: VB) because it generally has the most long-term growth. There was one year of a big drop, and the growth of the last year didn’t catch up too much. It’s not the luckiest of circumstances, but they are still up about 6% over five years.
My 11-year-old’s Roth IRA is currently at $7,200. At age 65, he would have an inflation-adjusted amount of about $100,000.
My 10-year-old’s Roth is at $5,465, he would have to settle for “only” $80,000. I expect that he’ll catch up at the end because he’ll have one more year of helping when my other son heads off to college.
It’s really hard to project more than 50 years into the future. I’m going to have to live to 100 to figure out if my projections are on target. I think I’ll just have to take it year by year and see where things end up. Even if my math projections are off, it will give them a very nice boost. Maybe they’ll be able to retire a couple of years earlier than they normally would have.
The Future of My Kids’ Roth IRA
Before too long, the labor laws will start to ease up. I’ve seen signs at McDonald’s hiring kids who are 14 years old. They’ve seen that sign as well. I’m sure it will be really tempting to make $15+ an hour at that age. I’m not sure if they’ll want to do that work, but it’s available.
There will be more opportunities for them to earn money as they get older. Helping Dad with the family dog business will probably just be a phase.
In the end, I don’t want to push them to work too early. I do believe they could use the discipline. However, they still need time to be silly kids. Of course, they also know that their core “job” is to get good grades in school.
Steve says
You can sort of double dip on the payments. They can deposit 100% of their pre tax income in the Roth IRA. You can gift them pocket money and even any money they need to pay for taxes.
Joe says
That’s great! They probably won’t be able to save that much, but anything really helps when you start so early. Just imagine 70 years of compounding… Wow.
Whew, I found out a bit more about the solo 401k and hiring your kid.
Apparently, a kid isn’t an eligible employee. To be eligible, you have to be over 21 and work at least 1,000 hours. So I think I’m okay with the solo 401k.
Thanks for coming back with the update. That’s really helpful.
I assume you’re going to hire them as contract labor? If they’re contract workers, they’d be subject to self-employment tax. So their earnings won’t be completely tax free unless you keep the self-employment income under something like $500 a year. I think that’s the limit anyway. You’re smart to check with your tax guy.
I look forward to the kid posts!
Yeah, I have to think about that. They might have to pay into Social Security, LOL. I think it would be around $1500 per child. That sounds like a lot, but the professional pooper scoopers are expensive and it is a relatively small fraction of the overall dog sitting money we make.
I thought there might be something where you don’t pay taxes until you make a certain number. I could be wrong, but my tax woman will know the answer.
I came across one of your blog comments on another post and I was so excited to see your name there. You were one of the first blogs I started reading when I began my blog long, long ago. I stopped reading and writing for a bit and lost track of my original blog list, but I’ve added you back in to my rotation. Anyway, I just opened a Roth IRA for my seven year old a few months ago. He holds lemonade stands in the summer and our accountant said that qualifies as ‘real’ income. He will only put away two or three hundred every year, but it’s a start!
This made my day! I’m excited to see you are still around blogging too.
My kids want to run a lemonade stand too. It’s literally one of the only ways they know how to make money. We might look into that, but I think there have been local ordinances cracking down on lemonade stands. (I’m not sure why.)
I had already talked to my text prepare and opened an account for my daughter. You cannot 1099 them you will have to give them w-2s. The W-2 will be under 12,000 therefore there will be no taxes on it and since it’s a Roth IRA it’s after tax which means it will never be taxed but you will get to write off up to $6,000 that you pay them from your own income It’s a win-win-win situation.