28 thoughts on “How to Fund a Million Dollar Roth IRA for Your Child with Government Money”

    • When our kids went to college, we made them a match deal. As long as they were in college, every dollar they earned and put into their IRA or 401(k) or any other retirement plan at a place they worked, we would give them a matching dollar. They could put money in their IRA, which wasn’t available to spend, and we would give them the same money so they could spend it. They got into the habit of funding their retirement early. It gave them a great head start.

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  1. Sounds like the kid only needs to record Roth IRA contributions and possibly (depending on income) file taxes. What paperwork does the parent/employer need to do (assuming the simplest scenario, not incorporated etc)? Thanks!

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    • Rich, There is nothing special or different for the parents to do. They pay the kids like normal out of their business account (don’t pay payroll taxes) and write it off like normal expenses. They will need to help the kids set up the Roth IRA at a discount brokerage firm like Vanguard, Fidelity, or Charles Schwab. Then make a deposit to the Roth IRA whenever the kids earn money.

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  2. We started doing this for our 5 and 7 year old in 2019. We pay them $1000/year to shred papers in our home office. They are paid as W2 employees of my S-corporation. Would I also need to file a tax return for each child? Is this the best way to set this up to get all the tax benefits? Thanks!

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    • Leon, you can only contribute up the amount the child earned. If the child earned $3,000 in a year, then you can contribute $3,000 to their Roth IRA. If the chld earned only $1,000 then contribute that.

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  3. Been doing this for years. My kids get the “daddy match” on their Roth IRAs. Whatever they earn goes in their Roth IRA, and I give them the same amount of money. Their cousins get a 200% match on their 529 contributions too.

    The trick for the young kids (once they’re older they can babysit, mow lawns, and eventually get “real summer jobs) is to find something that pays well that is legitimate to the IRS. I settled on modeling for the website. Child models have a pretty decent hourly rate.

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    • You’re thinking a SEP-IRA Rajat, for the self employed. But you don’t want your kids to be self-employed. You want to them to be employees of your non-incorporated business so you don’t even have to pay payroll taxes on them.

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      • Why a non-incorporated business?
        We both work for a multi-specialty group that files K-1. There is no way for them to work for our group.
        We own rentals but not as a real estate holding company.
        Could they work for us even if we just hold the properties as individuals? Or technically in a trust.

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        • Anna, Your kids can work for an incorporated business, but they cannot do it without paying standard payroll taxes. Only when they work for their parents, do they avoid the taxes. This is a special benefit the government gives to small businesses. As far as your rentals, your kids can work for them even if they are not in a real estate holding company, and they would still avoid payroll taxes. Being in a trust does not negate this as long as the trust is only the parents.

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  4. Fantastic read. So important for kids to learn the value of contributing. We are starting this for our 7 year old. Age appropriate income. Love it!

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  5. Cory, what are some options if I work at a multi-specialty clinic and my earnings are a K-1. Would much kid need to be hired as an employee by HR?

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    • Chelsea, then your kid would be employed like everyone else and not get the special tax breaks but can still do a Roth IRA. When my kids were in college, I told them I would pay them dollar for dollar for everything they put into a retirement account. It motivated them to fill up their accounts at their part time jobs.

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    • Tom, it’s a great thing to do for your grand kids but you can’t get the special tax advantages of no payroll taxes as that is only for children, not grandchildren. There is a way for your children to form a company that you hire as 1099 and they hire their kids (your grandkids) and can avoid the payroll taxes.

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    • Roger, each state has different rules. But keep in mind the child should be doing something age appropriate and legitimately contributing to the business. A 2 year old can’t file papers, but a 13 year old can.

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  6. Excellent post, I’ve been doing this for 3 years now for my 12 years old daughter, I would like to add that in order to legally avoid FICA taxes, the child’s income has to come out of the parents sole proprietorship (schedule C) as a W-2 income.

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  7. Wow, those numbers are really cool! I just started doing this for my kids. they are younger and will not be working that many hours- but even a little bit adds up- since they have decades stretching out.
    Thanks for a great post!
    PFB

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    • Physician Finance Basics when the kids are little, there are still some things they can do. But your are not likely to get them up to the full IRA amount. But as they grow and learn, they will be able to do more and you will have given them a great head start. Just teaching them to same money is a win.

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