The following article is brought to you by Kid Wealth and is closely related to Kid Wealth’s Kid Roth IRA article.
Two years ago, my kids got a Roth IRA to jump-start their retirement savings. It was a little aggressive for a 5 and 6-year old, but I wanted to start them early. By starting now, they’ve got the most valuable thing on their side – time.
It can be difficult to get a kid a Roth IRA. On one hand, you have the IRS with the annoying rule that the kids have to have earned income to put into an IRA. On the other hand, you have pesky labor laws that limit the work a kid can do. It’s a shame that my baby modeling idea never took off. I also don’t see people lining up to purchase their wonderful Pokemon art creations.
Kid Roth IRAs with a Side Hustle
So how do they earn this money to comply with the IRS demands for funding a Roth IRA? I pay them to help with my dog sitting business on Rover.com. In non-COVID years, I can make around $15,000 a year, which is a nice side hustle while I’m freelancing from home and writing this blog.
I’ve been dog sitting for five and a half years now, so the kids have grown up with a couple of extra dogs around. They’ve become naturally curious about feeding dogs and they love to play fetch with them. We’ve taught them how to pick up the dog droppings, but that’s not something they like. Some of their peers do the chore for allowance. However, for the family dog sitting business, it’s a core aspect of the job.
Feeding dogs, playing with dogs, keeping the water bowl filled, and picking up after the dogs is most of the dog sitting job. These are all things that my kids can do. Occasionally I have to give them medicine, but that’s about the only thing that I need to do 100% myself. The IRS should have no issue with me subcontracting out some of the work to them. In fact, I did some math on what a professional pooper scooper company costs, and it seems like it could be a couple of thousand dollars a year for the number of dogs we have and how often they’d have to come. My kids aren’t professionals, but the service doesn’t fill the water bowls or play with the dogs, so I think it averages out.
[This article has been refreshed for 2021.]
Kid Roth IRAs: Powerful Stuff
Contributing to a Roth IRA at this age is very, very powerful. Money grows quite a bit nearly 60 years of compounding until they reach ages 65 and 66.
Before we get to my kids’ Roth IRA numbers, here’s a helpful CNBC look at kids and 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. If they were to earn 7% interest over that long period of time, a single dollar would be nearly $58. So $1000 in a Roth IRA would be worth $58,000. Of course, at 3.5% inflation over that time, you’d need $7,878 to have the buying power of $1,000 today.
When you crunch those numbers, it gives them a real post-inflation gain of 7x their money. Theoretically, if they could earn the $6000 Roth IRA limit, they’d set themselves up with $42,000 in retirement. Of course, that would be an extreme amount of dog care and that wouldn’t be reasonable.
In addition to the Roth IRA, we pay them some real spending money. They saved up for a Nintendo Switch before the pandemic. That was really good timing, because they were hard to find last year.
I settled on paying the younger one $400 and the older $600. In the next year, the younger got $600 and the older got $750. Since he’s a year longer, it works out to be fair as he’ll have an extra year at the end. This year, I’ll go to $750 and $1000 for each. The dog sitting business is going well with everyone traveling now that they are vaccinated.
Here’s how my 8-year-old’s Roth IRA grew to $1891.99:
Here’s how my 7-year-old’s Roth IRA grew to $1368.73:
The 8-year-old would have an inflation-adjusted amount of $13,443.70 in his nest egg at age 65. My 7-year-old would have to settle for “only” $10,066.02. I haven’t contributed to their accounts yet this year since dog sitting income got started late with COVID. These projections will go up once that happens.
Investing in My Kids’ Roth IRA
I normally believe in investing in only index funds for them. However, they always have some money left over. With VTI trading at $222, I buy a couple of shares with $600 and have over $150 leftover. I can buy some other index funds but sometimes I look for some satellite stocks. The theory is that you have core holdings and then little satellite holdings to explore. That’s why it’s also called “Core” and “Explore.”
Core – I’ve decided that the core of their portfolio should be the Vanguard Total Stock Market ETF (symbol VTI). Last year, I bought as much I could and then used the rest of the money (less than $160) to explore. This year I did the same. One child got the high-dividend ETF, symbol HDV, that I’ve been touting lately.
Explore – Last year, I explored with Exxon and Ford stocks. I liked that they paid high dividends. I had an idea that I could show how reinvesting the dividends grows. It all sounded good until COVID happened. Ford eliminated its dividend completely. This year, I explored by buying more Exxon (dollar-cost averaging) while it was still paying a big dividend. I also explored by buying all three cruise lines (Carnival, Royal Caribbean, and Norwegian) with at least a share of each. It turns out that those stocks all performed well. Ford’s stock is up nearly 100% as they look to an electric car future. The cruise lines are up 100% as it seems like cruises will be possible soon. Even Exxon has benefitted from rising oil prices.
I don’t have a plan on how to invest their money this year, beyond buying VTI as a core holding. Perhaps we’ll put money into VEU and VWO which focus more on international investing. It might also be time to sell the satellite stocks and put the money into these more traditional indexes.
Because the account is with Fidelity, the no-cost commissions make it easy to diversify by buying a share here and there.
The Future of My Kids’ Roth IRA
In the next few years, I’m hoping they can participate in some of my blogging work. (The older has helped a little bit with my MoneyTime Review. Perhaps later this year or next year, I’ll introduce a bi-weekly kids article. I’ll interview them and get their perspective on what money-related thoughts they have. I’ll then explore how we are parenting their use of money. This is just a seed of an idea. I need to think a little more about how this would work. Of course, I’d pay them for their time and insight, which would be earned income.
After that maybe they can do babysitting or lifeguard work. There will be more opportunities for them to earn money as they get older. While all this is nice, their core “job” now is to get good grades in school.
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.
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.
Lazy Man says
Thanks for coming back with the update. That’s really helpful.
Abigail @ipickuppennies says
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!
Lazy Man says
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!
Lazy Man says
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.)
Joseph Jakubowski says
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.