EP 28 – Roth IRAs for Kids: Rules and Steps to Establish

Mark and Mat explain how you can open and fund a ROTH IRA for your children, grandchildren, or even your nieces and nephews. Pass on a legacy.
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Mark Kohler: Welcome, everybody, to this kind of condensed podcast for this week at DirectedIRA.com. My name is Mark Kohler. I’m here with the infamous Mat Sorensen, the author of the Self-direct IRA handbook. And pretty good guy

 Mat Sorensen: Now, mommy. Thanks. Well, thanks for that, Mark. I mean, I’m I’m here. You know, Mark’s kind of a big deal, so I’m just like you do a podcast with them and talk about the one thing near and dear to my heart, self-directed IRAs. And today it is a little short episode is just kind of a little nugget that we wanted to get out there and a condensed format. How to do a Roth IRA for your kids

 Mark Kohler: Or Grandkids, nieces, nephews,

 Mat Sorensen: Nieces, nephews,

 Mark Kohler: Pretty much anybody that’s a freeloader in your family. Let’s get them a Roth.

 Mat Sorensen: Yeah, because that’s tax-free. I mean, it goes with the freeloading concept.

 Mark Kohler: Yes, that’s right. That’s right. If you’re going to spoil your kids rotten and screw them up, which we’ve given tips on how to screw up your kids before, why not give them a Roth IRA and do it right? OK, now I want to just tell you, we’ve been pumped up for the show today. I was playing some Megadeath in the studio before the show. Yeah. I mean, like,

 Mat Sorensen: I popped in here and I was like, am I in the right place? What’s going on here

 Mark Kohler: That some of you that

 Mat Sorensen: Are in the studio just get robbed and there’s somebody.

 Mark Kohler: Some criminal just ran out the door and hit Megadeath on the way out.

 Mat Sorensen: Strung out on drugs. That was just Mark.

 Mark Kohler: Yeah, my my PO to stop by to check in on me. For some you that have not served any time in the big house, that would be your parole officer. I have not just FYI.

 Mat Sorensen: I read it in Law School I mean that’s how I know. Yeah.

 Mark Kohler: Yeah. That’s how I know POs from law school. But anyway, any of you that are probably a little older crowd from the 80s, there’s nothing like some good freakin acid rock. It’s not heavy metal, it’s not classic rock, it’s called Acid Rock. And I’m going to give you all a little tip. Gold You Tube Jim Brower on Slayer. Just go YouTube. Jim Brower, who’s an amazing comedian. So funny. I don’t care how old you are, you will love this guy, Jim Brower on a Slayer concert. He goes he takes his wife to a Slayer concert. I watched that the other day and I’m like, you know, I’missiing a little acid rock in my life. And so, yeah, I came in here and exposed why he

 Mat Sorensen: He was on he was on Saturday Night Live for I think like a season or two. I don’t know, he’s on there for a little bit. He’s he’s pretty hilarious. So. OK, OK, kids Roth IRA topic are Roth IRAs for people under 18, maybe even just more generically. Can I make a first preliminary comp before we get into that?

 Mark Kohler: Yeah, no, let me start the title right here, because I want to kind of create an intro that can be clipped to YouTube. For those of you that are listening on the podcast, please know that we simulcast this and we have a YouTube following that just primarily likes to just watch it on YouTube because I’ve got a face for radio and they’re like, wow, that guy really is ugly. So you want to confirm that you can go to YouTube and watch this. So I’m going to so I’m going to intro you. OK, here’s the intro and then Mat you give your statement. So we have been getting a lot of questions about how to fund a Roth IRA for my kids under age 18. Even those freeloaders still sleeping on the couch, eating my cereal, including grandkids, nieces and nephews. And so we want to give you the rules, the strategies, the tricks, the loopholes on how to fund a Roth IRA for those kids you’re trying to spoil. This is a great opportunity. And Mat, you have a preliminary statement?

 Mat Sorensen: Yeah, my my little preliminary statement, if I could if you would yield some time. Yes. And I’d like to make I will indulge you. Yes. OK, this is like you know, the instructions on the airplane when they’re like, don’t put the mask on the kid, put yours on first, then put the mask on the kid, do your Roth IRA first, then do a Roth IRA for your kids. And if you’re high income and you’re thinking I make too much money, I can’t do a Roth IRA for me. No, through the backdoor Roth IRA, we’ve got a lot of videos and content on that whole podcast episode. I want to say at the beginning, we want you to do yours, but after you funded yours, you’re like, I love the Roth game, I want to get my kids in on the Roth game. That’s what were going to talk about next.

 Mark Kohler: And we’ve got other videos on the concept that no matter what income you are, you can fund your Roth and your 401k at work. You can do both. I mean. The world is your oyster people, but today we’re just going to focus on the kids. All right. Mat, can I start with kids under age 18? I’ll make my initial thought. OK, let’s just talk basic strategy loophole. Anybody in the country at any age can create a Roth IRA if they have earned income. That means when Miley Cyrus was on the Disney Channel at age four years old and five, whatever it was, and they were paying her a paycheck and her parents were absconding it. I’m just joking. They weren’t doing that I’m just playing around.

 Mat Sorensen: Philly, right? No way. No way.

 Mark Kohler: No way. Her parents. Right? Yeah. Billy Ray is a stud. He’s like, just be on a show with me so I can reinvent my career. So anyway, even a kid that has a little W-2 at age four, five, six years old, can fund a Roth IRA, even someone in their 60s, 70s or 80s that has a little earned income. Maybe you’re paying yourself a management fee for your rentals. That’s earned income. Now you can fund a Roth and even a spouse without earned income is attributed earned income. If they’re a stay at home dad or a stay at home mom, if they’re married and their spouse has earned income, they can still fund a Roth. So the point number one is you can do a Roth at any age. And if you think you make too much money wrong, we have what’s called the back door Roth. That’s another video. Go search for that. So Mat, that would be my first statement. Get that off the table. Don’t worry about your age. Don’t worry about married or single. Don’t worry about your income. There is a way to do this.

 Mat Sorensen: Yeah, an earned income can be money your kids make from babysitting, from shoveling the snow at the neighbors, from mowing lawns, from working in your small business. If you want to take it to the next level for any of you business owners or you don’t. Hey, your kids, which is a great tax strategy, make an expense for you and your business and pay your kids and they’ve got an earned income.

 Mark Kohler: Yeah. Now, in fact, I had a close call with the police this last week because I love to support lemonade stands and I’ve got a little hashtag support, a lemonade stand hashtag. I mean, hashtag support a lemonade stand. And if you go throw that in any of your social media, you’ll see a lot of posts of mine. Other people have been using that. So I would challenge all of you when you see a lemonade stand, pull over and just buy everything they got, throw some cash. I mean, it, you know, give these kids I mean, the other day they here’s my close encounter. I stopped and these kids, they run over to my car and these little kids were like, hey, it’s it’s fifty cents for a cup of lemonade. I’m like, great, I’ll have two of them. And they bring them over and I give them a five dollar bill and they go to get changed. I like I keep the change and they’re like their ice get as big as silver dollars, they’re like oh my gosh a five dollar bill. And then I go, OK, now come over here. Do you know you’re living the American dream? This is huge. And you can fund a Roth IRA. And I started to scare them. They were freaking out and the Mom came running out. What are you doing? I’m like, these kids can fund a Roth IRA. She called the police. I mean, it was a big to do. Now, that didn’t really happen. But I did tell them, you’re living the dream. And they’re like, Mister, I have no idea what you’re talking about. And but I did give them a five dollar bill. Yeah.

 Mat Sorensen: I’d love it if they actually called you mister. It would have been awesome.

 Mark Kohler: You know what? I should have finished my story and you said no, you did it. Yeah, well, I did give him five dollar bill, but no, the police did not show up.

 Mat Sorensen: But no they didn’t.

 Mark Kohler: No, they do. But I haven’t. There’s a movie there with Adam Sandler for you, hardcore movie critics. But I do support lemonade stands and I like what Mat said. Even kids with just nominal income, they don’t have to file a tax return even they can go fund a Roth IRA. All right. OK, so we talk.

 Mat Sorensen: So, yeah. So don’t stress. It’s like, well, they don’t have a W-2. I’m not finding a 1040 to the IRS because they’re under the standard deduction. You know, even if your kid’s got like a a job, they work at, you know, a fast food restaurant or they wait tables or they whatever they’ve got, you know, the job I had them since I was 14 as a kid. Like even though they may be under the standard deduction, so they’re not required to file a tax return to the state or the IRS. They can still contribute. That’s not necessary to make the contribution into the Roth IRA after they had earned income as what’s necessary.

 Mark Kohler: I love it. Now, let’s talk about how so first, you want to make sure your kids have earned income? Now, this could be a niece, or nephew, or grandchild. Now we’re going to talk about where to set up the Roth and what they can do with it in a moment. But let’s just talk how if your kid doesn’t have a little side gig of mowing lawns or babysitting, this is where many of you who are listeners of ours for years know that we are huge advocates of the small business. We want all of our clients to have a side hustle. Why don’t hire a kid hire your kid, you know, they could be a college, they could be a five-year-old, I didn’t put my kids on payroll till they were six. I had him shredding paper, cleaning the office, polishing shell casings with their fingertips. I mean, they really worked them. I worked them hard. And you can pay them out of your business. So whether you have rental property or you’re driving Uber, have your kid wash your car, have your kid, you know, detail the car before you go on your Uber rides that as a write off because you were in the Uber business and so pay your kids to do that. Is that crazy? Some of you’re like, Really? Yeah. And you have now earned income. Now whether they file a tax return or not, that’s a whole other topic. But just start paying your niece and nephew or your grandkids for doing work for you if you pay. OK, can I say one more thing, Mat and one more thing. If you pay your own kids under age 18 or a stepchild that’s independent of yours in your house, you do not have to withhold Sudafed or Ficca at any pay level. You do not have to do the to. You may, if you pay them enough, be required to withhold state or federal tax, but there’s no ficca, no workers comp, no SUTA, FUTA, or FICA when they’re your own kids under age 18. But if you are going to pay your nieces or nephews or your grandchildren and you pay them more than 600 dollars, they’re now going to receive a 1099. Follow those rules, keep good records. There is another loophole where I will sometimes 1099. The aunt or uncle, your brother or sister who then pays the kids or 1099 your own kids. That pays the grandkids through a little support company. And there’s, that’s a chapter in my book and we could talk more about that later. But the point is, get him some earned income by putting him on the payroll or as a subcontractor. Now that’s step one Mat what would you say is step two.

 Mat Sorensen: And whatever their earned income is, that’s how much they can contribute. So the limit six, that if your kid had a thousand dollars in earned income for the year, they can put a thousand in to the Roth IRA, even if they spent it gift them a thousand. Yeah, I mean, that’s what I love. Like people, parents like especially with your teenagers teaching them how to save and be like, hey, I’m going to match it. If you throw in 500 bucks here, I’ll throw in five hundred. You know that teach them how to save and what it’s like out in the real world too. That’s a great parenting tip. OK, step two you need an independent account to do this. You know, you can’t just set up a Roth IRA yourself. You need an IRA with a company that is going to receive this contribution and you can put it in every year based on whatever earned income they have. And we do Roth IRAs, of course, that directed IRA. You got a brokerage option on it if you want, where you could buy and sell stocks and mutual funds, or better yet, you could self-direct it like many of you may do with your own account and throw it in on some deals. We have lots of clients over here who put their kids in on deals with them, who throw their kids on assignment deals or wholesale deals that only take a few thousand bucks. And so those are deals you could try to get your kids in kids roth with your kids roth star Kid Roth in with a little to only a little bit of money. Now, if you’re like guys, I just want to put five hundred bucks in. I just want to trade it or save there’s I mean, Fidelity does kids Roth IRAs, you know, there’s lots of places that do this. But for those that want to self-direct and have kind of the full spectrum of what they can do and grow their kid’s account exponentially, like you may try and do with your own Self-directed account, we got you here at Directed IRA. We’ve got lots of Roth IRAs for kids over here.

 Mark Kohler: Yeah. And that Roth IRA could be even a crypto IRA. I thought that was going to say that by helping your kids just buy five hundred dollars worth of some crypto coin and teaching them what that is. And we’ve got families that have really kind of created a family camaraderie. You know, they’re talking about the dinner table and the parents are asking their kids, which cryptocurrency do you like? And the kids are like, oh, mom, you dad, you need to do this. And all of a sudden the kids light up. This is a great way to build self-confidence, even if they lose their money. But I’m good. But because they’re like mom and dad care, what I think it’s a good lesson. But Arrested Development. That’s why you never trust a man from harm anyway. But no, you can really have some fun as a family investing together. And I’ll just say it. Families, that invest together stay together, OK? I don’t know if that’s true, but I’m just saying it.

 Mat Sorensen: Yeah, that’s debatable.

 Mark Kohler: I know several marriage and family therapists would go, no, they don’t.

 Mat Sorensen: I think if you look back on yourself and you know what cool things you wish you knew as a kid is getting your kids engaged in that. And I’ve done it with my kids as they hit college. Actually, I paid my kids out of my business, and did that, but started helping them with Roth IRAs once they reach college and could really appreciate it and grasp it, too. And you can do that, too, with your kids in college. You know, they need your help in figuring this out. They may be eighteen and can do it on their own, but they’re not. H  elp them along in this path, teach them about what a Roth IRA is and how powerful it can be. Because those that start young and everyone tells you, all of us parents out there, grandparents, they’re like, well, if you just put five thousand bucks in when you were twenty, you know, you’d have a million bucks in your IRA. And if you don’t put any more money in. Yeah. And you can’t go back in time. But what you can do is go help your kids, your grandkids, your other loved ones, teach them how to save get them going on that journey.

 Mark Kohler: Yeah, absolutely. And I want to make a college comment as well here in a moment, but we’re almost done. We’re trying to wrap up this kind of a brief to the Point podcast and YouTube video here. Mat really blended part two and three. And the reason why he did is because part two, part two is choose an open an account in step three is start investing. Well you kind of have to start with the end in mind? Am I going to self-direct then you want to set up a Self-directed account? If you’re like, I’m just going to buy EFT, Stocks, bonds, mutual funds. Then you could go to an Ameritrade or Fidelity app and just set up a Roth for your kid right there. So step three is the actual investing part. Step two is opening the account. But we don’t want you to open the account somewhere where you feel like you’re hogtied. You’re like, well, I set up an Ameritrade account. Now I want to buy real estate and throw my kids Roth in. You can’t do that, Ameritrade. You should just set up a Self-direct account. Oh, darn. So think Crypto, think stock market, think real estate. What are you going to do with that kid’s money and work backwards and that’s where you want to set up the account. Then step three is getting around the kitchen table and talking about investing.

Mat Sorensen: Yeah. Yeah I love it.

 Mark Kohler: Ok, college comment. I teach some part-time classes here and there at the local college with some other professors and I have now made it a habit. Every time I get in front of the class, no matter what I’m teaching, could be a marketing principal, a business or a law principal legal. I ask how many of you know what a Roth IRA is? And these are oftentimes junior senior level courses and thirty let’s say there’s thirty college students in their Mat. I swear five five hands go up, maybe seven. We’re talking maybe 10 to 20 percent of that class. Even know what a Roth IRA is that don’t say keep your hands up. Which one of you I’m going to give you something right here can explain what a Roth IRA is. And then out of that, five or seven, maybe one will keep their hand up and they’ll try and go, oh, OK, good job. You get one of my books and they’re like, what the hell? I was going to get Mark Kohler books worth it. I you were going to give me five dollars or something, you know, you get for my books.

 Mat Sorensen: Yeah. This is an assignment.

 Mark Kohler: This is better than cash. You need a book by Mark Kohler. They’re like I spit on it, you know, they don’t want to read.

 Mat Sorensen: Let me make an important point to know, though, on the Roth IRA for kids is when they reach the age of 18 or in some states it’s 21. They can control the account. They can withdraw the money out, they can move it somewhere else where you don’t know what the heck’s going on with it. So just keep in mind, with Roth IRAs, these are a little unique in that they’re individually based. So your kid actually owns it. Now you’re the guardian while they’re a minor. So you get to control it and decide what to invest it into. But once they hit that age of majority in their state, they get to control the account now, which is different than a Coverdell. Yeah. When you do a Coverdale for your kids, which we have an episode on Coverdell, how to help them save for college again, you can self-direct to you could control and be the responsible person on it even when they hit 18 or 21. So you can still control where that money gets spent and how it’s invested.

 Mark Kohler: Yeah. So which means the rule or what do you say. The moral of the story is do not tell your kids that. Yeah. You say you can’t touch this

 Mat Sorensen: Or better teach them the importance of it. That’s the point. Yeah. To get them involved, let them love it by the time they get to that age or when they’re at that age and you’re setting it up, make sure they understand the long term principle and the beauty of tax free growth.

 Mark Kohler: Yeah, OK. Now I’m going to leave it with this and hopefully those that saw this on YouTube, please subscribe and give us a little thumbs up and hit the bell icon. We’re shooting video and podcasts every week. For those that are on the podcast, please. If you found this useful again, give us a little five star rating. It really helps others find this important information. It’s life changing. And I want to just give one last tip and then Mat let you finish up with a tip, and that is. Dave Ramsey, he’s done a lot of good. Now, I’m not on the same page with him on using debt for investing in real estate and some things like that, he wants you to be debt free in every way, shape and form. I think using debt in some ways is smart, but he is still changed my life he changed the life of so many people in the country. And if you haven’t listened to Dave Ramsey, a few podcasts of his will really give you a good dose of financial thrift. I think that’s really what he teaches. Well, I would recommend and I’ve done this with my same kids, and they literally have probably watched this 10 times because I make them watch it when I’m doing a presentation in the house with other college students or something. Go to YouTube type Dave Ramsey, compound interest. There’s a video called The Power of Compound Interest by Dave Ramsey. It’s about four minutes long. Look for about a four minute video let’s put it down on the show notes. Corey, can you do that? Put a link to Dave Ramsey’s power of compound interest in the show notes and watch that it is so powerful in just three to four minutes. That explains how a few hundred dollars a month or even a couple hundred dollars a month now with your kids can turn into millions of dollars down the road. It’s really a fun video. Mat any final words?

 Mat Sorensen: No, I just love it. Make sure I want to just say don’t just set up the Roth IRA and not tell your kids about it. Now, you

 Mark Kohler: Tell them about the IRA. You just don’t tell them they can touch it.

 Mat Sorensen: I know, but I do think this is a good teaching moment. I still remember helping my kids do their first tax return. I have my oldest just graduated from college and my second to college. They’ve got to do their own tax returns. This is the crap no one teaches. And this is why when Mark’s in a college classroom, they’ve never heard of this stuff. Yeah. And it takes kind of the parent to to to be the grandparent or whoever you’re thinking about doing this for, to kind of take that time and be that mentor to them about taking control of their finances and teach them these powerful accounts and ways to save. So I just want to say it’s just a not only can you help them do it, but let’s teach them along the way too.

 Mark Kohler: All right, whatever

 Mat Sorensen: A bunch of us probably, you know, uppity and, you know, touchy feely at the end.

 Mark Kohler: Whatever I got my diet dew for the day, so.

 Mat Sorensen: Hmm, OK,

 Mark Kohler: I already had my rock star this morning. OK, everybody, we’re going to take you out with some Megadeath. Whoo! Actually, we can’t do that. Can we have a copyright infringement. Damn. I got to call the guys over Megadeath and be like, hey, can we get our music tax show?

 Mat Sorensen: Yeah, let’s get that licensed over here. That’d be great.

 Mark Kohler: They’re probably all of our listeners already.

 Mat Sorensen: Oh yeah. So just send us an email. Just give us your consent. We’ll play it next time. Yeah. All right. Thanks very much. I’ll see you next week.


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