My kids are getting a Roth IRA to jump-start them to an early retirement. How? Read On.
Yesterday, my dog walked me to a yard sale. I’m used to be walked places by him since he’s a sled dog. Rarely is there anything very interesting. This time was different:
Found a bunch of a games at a yard sale. Picked out 8 classics. The seller wanted a dollar a game. I offered a $20 and she was so excited. pic.twitter.com/15pn17PJew
— LazyManAndMoney (@LazyManAndMoney) April 28, 2019
Someone asked why I negotiated up at a yard sale. If someone is going to save me $50-60 in something that will give our family literally hundreds of hours of entertainment, I don’t mind giving him/her an extra Hamilton. It makes the seller’s day and keeps the money in the community. My day (with the savings) and my kids’ days were already happy. It’s a rare, feel-good case where everyone wins.
It was later that evening, during a family game of Rack-o where I had a revelation – my wife was going to win the game. I had a pretty poor board and I pinned myself into needing a couple of specific numbers. Although there were four of us playing, it was a simple matter of process of elimination…
… the other two players were my 5 and 6 year old sons. The game is 8+, so there were no expectations that they would be able to play a strategic game. So jokingly, said that they were a “couple of buffoons.” Everyone laughed because buffoon is a funny word, especially for a 5 and 6 year old.
That’s a long Grandpa Simpson Story way of saying that I hired my sons to do real work. I’m going to pay them real money. They’ll start funding their retirement plan this year.
Kids and Roth IRAs
It’s difficult for a child as young as ours to build wealth. They get money on birthdays and Christmas. Occasionally they give my wife a toy to sell on Ebay. We recently started to have them do some chores around the house for extra money.
Their ability to earn extra money is very limited. The US Internal Revenue Service (IRS) makes it clear that only earned income can be used for a Roth IRA. The problem is that my baby modeling idea never took off. I also don’t see people lining up to purchase their wonderful Pokemon art creations.
For a more detailed look at kids and Roth IRAs, CNBC has a helpful video. It’s especially powerful to see the amazing growth of compound interest over 55 years. Who wouldn’t want 3.4 million in one of their accounts?
So how are they going to earn this money to comply with the IRS’ demands for funding a Roth IRA. I’m going to pay them. Unfortunately, the IRS doesn’t let you pay them for household chores. For many people that’s a show-stopper for kids this age.
I’ve been doing this for three 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. They love to play fetch with the dogs. Recently, we’ve introduced them to picking up the dog droppings. It’s a chore that their peers do for allowance. However, for the family dog sitting business it’s a core part 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 thousands a year for the amount of dogs we have and how often they’d have to come.
My kids are going to go into the dog sitting business. I haven’t figured out exactly what I will pay them. I think the professional pooper scooper service may be a good guide. My kids aren’t professionals, but the service doesn’t fill the water bowls or play with the dogs.
Contributing to a Roth IRA at this age is very, very powerful. Money grows quite a bit with 60 years of compounding until they reach ages 65 and 66. 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’ll be paying them some real spending money. They are saving up for a Nintendo Switch, so we’re going to be creating a chart of their progress.
Finally, in the next couple of years, I’m hoping they can participate in some of blogging work. 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.
Impact on Our Taxes
I have to check on this with our tax planning, but I think we’d make out well with this too. We’d be able to write off the amount we are paying, just as we would a professional service. Of course our kids would have to report the income, but it would be too low for them to be taxed on it. As best I can tell, this (small amount money) wouldn’t be taxed all and, since it is going into a Roth IRA would never be taxed.
I think it gets more complicated with them helping out with the blog since it’s an S-Corp. I may have to set-up payroll and things like that which get a little tricky. I’ll definitely need some professional tax guidance on that.
Again, I’m not sure if my understanding of that is accurate, so please check with your own tax professionals before trying anything like this.
After all, the real buffoon in the game was me. My 6 year old won handily.
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