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

  1. Is it legal to issue 1099-NEC to minor children? An independent contractor status implies the worker making their own decisions, setting their own work hours and no control from the employer. Those criteria can’t be applicable to minors.
    Could you confirm it’s OK to report payment to a minor child on 1099-NEC from the parent sole proprietorship?

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    • Rajat,
      Just go in and open a bank account for you child. You will likely need to also be on the account as an adult. It has nothing to do with payroll. Simply ask how they open accounts for kids at your bank and they have a plan.

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    • Bil, It doesn’t matter what your business is as long as it is not incorporated. The key is the children must be doing a real job that is appropriate for their ages. The 3 year old can do modeling if you pay them for pictures you use with your business. Look at what your business does and find a real job the kids can do for you. There are always little things to do that don’t require special expertise.

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    • 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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  2. 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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      • Thanks; I should have been more clear though. If the parents have no official business, what type of business do they need to establish first? Partnership? LLC? S-corporation? Corporation? Or any of the above will work? Thanks!

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        • Rich,
          If a parent has no business, then they don’t get any special bonus. The cool part is the bonus the parents get through their business. Any business you are being taxed for will work as long as it is not a corporation and the parents are the only owners of the business. You can own one rental house and that is a business. It has business write offs that show up on schedule E of your tax return. The kid just needs some earned income to do an IRA and they have more if they get it from mom or dad because they don’t have to pay social security.

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          • I have rental income but I’m extremely confused on how to go about paying my kids for chores I make them do.
            Do you need to provide a w2 or 1099 at the end of the year to your kid?
            Thanks in advance!

  3. 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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  4. 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.

    Reply
    • 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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  5. 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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  6. 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.

      Reply
    • 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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  7. 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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  8. 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

    Reply
    • 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.

      Reply

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