Mark Kohler explains how to set up Roth IRAs for your children using earned income from a family business. Kids can contribute up to their earned income or the annual limit, and the money grows tax-free. You'll need to issue a W-2 and can use self-directed IRAs to invest in real estate or other assets.
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Hey, Mark Kohler here. Want to talk about setting up a Roth for your children? Is that even possible? Can you do a Roth for your children and save for the future and get a pretty cool tax strategy out of it? Absolutely. Let's run through the rules. Okay, I got my whiteboard here because this makes much more sense visually if we throw it on a whiteboard. Rule number one, kids cannot have a Roth unless they have earned income. They have to have earned income. You can't give them money to open a Roth. You can't have them invest in stock, bonds or mutual funds and get passive income and open a Roth. They have to have earned income. But that's okay. We can do that. Now, any child under age 5 or 6, unless they're a superstar in some modeling scenario or acting, they're not going to have earned income. But I am a firm believer that kids under age 18 can start working in a business. And if you're an entrepreneur, even with rental property, let's get the kids involved in basic rental property maintenance or even bookkeeping, shredding, paper, cleaning the home office. Let's get them involved. That's what's going to generate their own income. So watch my other YouTube video on hiring your kids under age 18. For those of you with kids over age 18, I got a video for that too. So watch that if you're. But here's how the Roth works. This is. I'm going to try to keep this video short and to the point is that ultimately you're going to have a small business. You got it. And so whether it's a sole proprietorship or an S corp, you're going to have this small business and it could even be an LLC taxed as a sole proprietor. So I'm just going to kind of leave this blah, you know, watch my other videos on all your options here. You could also have rental property here. You could have a rental property up here in a rental LLC, maybe VRBOs, Airbnb or long Term rentals, whatever. Whether you have an active operational business or a rental property, you have now got the machine that can pay your kids to be in the business. Now if you have an S corp, I set up a little property, I'm sorry, a family management company, a sole proprietor here. Watch my other video on that. But the point is we're going to pay the kids right here. Now, once your kids have earned income, they can fund a Roth. So if I have a 6 year old and I'm going to pay him $1000 a year for cleaning the office, 1200 a year, maybe $100 a month. I could swallow that. That could be realistic. So if I paid the kids $1200, they can open a Roth and put $1200 in up to their earned income. The max is 5500 this year. So I could pay the kids $5500, maybe a teenager, and they could put that 5500 right into a Roth. Now when that happens, if you're going to fund a Roth, I'd like to issue the kids a W2. Now those that have worked with my office many times, we just call this outside labor and we never issue the kids a W2. But if you're going to go fund a Roth, a lot of time a brokerage company is going to be like, oh, this kid's 10 years old. How do they fund a Roth? And you have to provide a W2 just because they're free, freaking out. But that's. It's not required because there's no withholding from the W2. There's no penalty because there is. The penalty is based on the withholdings. There is none. So if you're paying your kids under the standard deduction, you're fine. So anyway, the W2 is more of a kind of a perfunctory thing to just help grease the wheels when you go through to set up the account at the broker dealer, if you will. So you get the kids pay and I'll pay the kids. Let's say we pay a child $4,000 out of one of these entities. Now you can open the Roth. Now we're still not done yet. This is where it gets good. Of course we think direct, self directing is critical and we love directed IRA links down below. Directed IRA is a great place to open up a Roth for your kids. And you can come over here, open up the Roth, pay them, drop the money into the Roth. They're not going to pay any taxes because their standard deduction will 0 out the 1040. Again, watch my other video on paying kids. The beauty of this is once the Roth is opened at your broker dealer directed ira, then the Roth can invest. And this is where it gets fund. You could open another LLC of which you're a partner or your Roth or IRA is a partner. And now you've got an LLC that's going to go out and buy rentals, buy super bowl tickets, buy Selena Gomez tickets and flip them, buy racehorses, bitcoin, cryptocurrency of any sort. Gold, silver, isn't that Cool. You can take the Roth and create an LLC owned by your child's Roth and invest it and then any of those profits go back into the Roth tax free. Now here's the last little twist. Why would we do this? Because not only can we start building a retirement account for our kids in a gross tax free and you can self direct it in an LLC. Watch my other YouTube videos on self directing and an LLC. Oh you'll love it. But what's cool here too is any contributions the kids put in, they can pull out tax free for college. So contributions come out tax free, no penalty, any age, pull them out for college, no problem. The growth, whatever this project of yours has created, those have to stay in the Roth and they build a retirement for your child. So you're kind of knocking out a college savings plan and at the same time building a retirement plan and you're getting a tax write off to pay your kids in your business. A tax write off to fund college tax free and then to build retirement tax free. Is that crazy? I just got chills. Because there could be even more. We could open up a Coverdell College IRA. Your self directed 401k could get into the mix. And now we're building multiple retirement accounts into one LLC and investing and what you know best. Now I know these concepts are part of multiple trainings of mines. My books, my videos, my classes. Please look into it. We've got S Corp strategies, we've got paying your kids strategies, we've got college saving strategies, we retirement account strategies and self directing strategies all here in one video. Boom. I love this stuff. So anyway, we're for real, real law firm, real accounting firm and I love helping people live the American dream. Check this out. Keep studying, subscribe all that good stuff. There's a little bit more to this video on how you can get involved. Thanks so much. Thanks so much for watching that video. And I want to be your source for tax and legal strategies. It's hard enough to live the American dream without being out on the web on Google trying to find answers to complex questions and just click in a mouse hoping you got it right. 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