Benefits of Kids Roth IRAs & Teaching Financial Literacy

Transcript:

(00:00) if you’re setting money aside for your kids maybe you’ve been thinking about a 529 maybe you’ve been thinking about a coverdell IRA I want you to think about a Roth IRA first be thinking how can I get my kids some earned income whether they’re 2 years old 12 years old or 22 years old we want to be looking at that earned income welcome everyone to the directed Ira podcast this is Matt s along with my co-founder of directed Ira Mark J kler Matt thanks so much and I am so excited for today’s show kids Roth IRAs oh my gosh when you came to the
(00:28) studio and said we’re talking about kids roths I’m like I am all in because me family is business business is family and if we can be teaching our kids about financial literacy helping them build Roth IRAs for college savings purposes as well as Retirement it is mindblowing it is so bonding so amazing and it’s really easy yeah and a Roth IRA whether you’re an adult or a kid to me is the number one savings account out there like this is the first place you should put your $1,000 for savings and we’re going to get into that and why that
(00:59) makes so much sense there’s so many reasons why that’s the case but we want you to think about it for your kids and we’re going to focus on that today how do I do a Roth IRA for my kids what are the steps what are the requirements and how can they use that how flexible is the account is that money locked down we’re going to be answering all those questions I love it in fact if I may I was going to maybe lead with what are the requirements what are some things you need to know that the boxes are checked and then we’ll go through these
(01:23) steps which are really quite easy and then unlock what the future potential could be it is just unbelievable so if that’s right with you yeah okay requirement wise when you want to fund a Roth IRA you have to have earned income now if you have a stay-at-home spouse that spouse’s income from the working spouse is attributed to the stay-at-home spouse so that that’s easy but with kids it doesn’t work that way just because you made money doesn’t mean your kids made money so so it doesn’t work in a uh in that situation with a parent child
(01:53) only in a uh husband and wife so with the kids we need to make sure they have earned income now this is where if you have a small business or some rental property you can pay your kids to help in the business that is earned income I’ve even had parents say oh my kid babysat last summer and probably made three grand great that’s earned income so any sort of earned income either from your business a paper route babysitting working at the county fair they could have a W2 or they could just be paid under the table earned income is earned
(02:26) income just fill out a 1040 to show that earned income and they’re not going to pay taxes this year on the first $14,600 that’s their standard deduction no one in the country pays taxes on the first $14,600 at the federal level so be thinking how can I get my kids some earned income whether they’re 2 years old 12 years old or 22 years old we want to be looking at that earned income requirement yeah and the annual contribution you can do to a Roth IR is $7,000 so if they made Seven Grand they can contribute $7,000 into the Roth IR
(03:00) if you’re like well they really only made about 2,000 bucks last year either from their own job or working in the business then put $2,000 in the Roth IRA now that doesn’t have to be their money from their bank account they could have already spent their money from their job or you paying them through your business that money is long gone but since they had earned income you can provide that money to be contributed to the Roth IRA I I was just going to bring that up that’s a great point a lot of people think oh well my kid earned the money
(03:27) but they spent it well you can gift your kids some money uh just under gifting rules to make up for what they’ve already spent and say use that as the earned income to make the deposit now the other requirement is timing see right now we’re past April 15th in 2024 I’m not sure when you’re listening to this podcast maybe two years from now but the point is you have up until April 15th to make a contribution for last year well right now we’re in the summer of 2024 so your kids are going to be making a contribution for the year 202 for based
(04:01) on their earned income in 2024 so the beauty is you’ve got all year to plan this you can start saying summer job some are helping the business the rental properties again whatever it is but you can’t have Grandpa and Grandma gift them money to put in an Roth IRA you can’t gift them money and call that earned income they’ve got to do something to earn it keep a little record of that and as Matt said you have up until you have up to $7,000 to deposit all the way until April 15th next year now that I wait you wait until then but that you do
(04:32) yeah so now a lot of people I know what you’re thinking right now is well Matt what is my 10-year-old going to do with $7,000 in a Roth IRA well we want to get into how they can invest it they can self-direct it we’re going to talk about that but I want you to think about if you’re setting money aside for your kids maybe you’ve been thinking about a 529 maybe you’ve been thinking about a coverdell IRA I want you to think about a Roth IRA first if we’re talking about sending your kids to college do you know that the money you put in a Roth IRA
(04:59) let’s say you have that 10-year-old and they’re going to go to college at age 18 and you want to have some money set aside for them all right if you put seven Grand a year away into a Roth IRA from them over the next eight years that’s going to be $556,000 now let’s say at the time they hit 18 that account is actually worth a 100 Grand well do you know that 58,000 of contributions can come out totally tax and penalty-free and can be used for college or any purpose maybe they start a small business they go to trade school
(05:27) it doesn’t matter the contributions you put into a Roth IRA can always be pulled out tax and penalty-free now that other 42 Grand that was invested in that growth they can’t pull that out with penalty and we want them to keep that and we want them to keep that invested and keep that growing but that 58,000 can totally use to go pay for college pay for a new small business pay for trade school whatever you need to do so that’s why I love the Roth IRA is a savings tool in an account now this’s this is deep you ready folks think about
(05:58) this you got a tax write off for paying your kids helping in the business that they put into a Roth IRA that has twofold purpose paying for future College expenses and future retirement you’re also teaching your kid about finances but you normally don’t get a tax deduction to save for college you don’t get a tax deduction to put money in your kids’s retirement account but remember you’re not putting the money in the Roth your kid is see it’s that extra step of paying them out of your business taking a tax deduction your higher tax
(06:30) rate they’re doing a 1040 Easy Tax return paying zero tax and then funding their own Roth IRA you’re up above the big picture controlling the situation helping teach them about this process it is so so powerful now I did talk about the covered Ira or also the education savings account now that is a tool we still like to use don’t get me wrong but I like to use the Roth IRA first but that doesn’t mean we’re not going to use an Esa now a 529 is another discussion a 529 for me you’re going to be invting in a mutual fund or some fund that the
(07:02) state requires go look at the investment Returns on this they’re atrocious sure it can be a tool but maybe that’s the third one I would use I’d go Roth IRA coverl then 529 let’s talk about the coverdell you can put two grand a year into it you actually do not have to have earned income so maybe you’re thinking about this for your six-year-old that doesn’t have any earned income can’t really be working in the business and so we’re thinking I can maybe set aside two grand for them in a coverdell education savings account sometimes called a cover
(07:30) IRA and you could be strategic with this as well because you could say all right this child of mine is too young to have earned income but I’ll at least do a Coverdale you won’t get a write- off for that in that sense you are gifting them $2,000 and putting it in the esa but if the kids are creating earned income add that to the mix so maybe you pay the kids $9,000 and the child puts seven in the Roth two in the esa now you got a tax write off to fund the esa indirectly see this is what is smart people do this is
(08:03) what wealthy people do it’s getting strategic and if some of you were already like oh my gosh my brain’s exploding make an appointment with one of our tax lawyers we we do a comprehensive tax plan on a on a daily basis with clients all over the country with a t Main Street tax lawyer so for a couple hours they can make a plan for you and these could be this could be one of the conversations you have so I just wanted to say man I don’t want anyone here to get overwhelmed we’ve got podcasts on this videos on YouTube
(08:33) writings in our books on this this is just the beginning to scratch the surface so get some support with one of the tax ERS very affordably and build this plan out and with that said let’s go through the steps because once you say okay here’s my strategy I’m going to do this the steps aren’t that bad it’s really quite straightforward yeah I mean we’ve got this three-step process we’re going to need to open the account now we have a specific kids Roth IRA application that you’re going to fill out as the parent or Guardian your
(08:59) you’re the one signing on behalf of the child you’ll have authority to interact with the account to make the investment decisions and so your kid needs to be involved and I want to make an important Point here when they turn 18 or the age of majority in your state they’re going to have control of this account so we want you including them in the process teaching them about this what’s the purpose of this why are we setting this money aside how does it grow and you don’t pay taxes this is an amazing learning opportunity for your kids I’ve
(09:24) done this with my kids Mark’s done it with his kids it’s a great way to have that conversation about investing but but it starts with the account application and you’re going to be the one in control as the parent and I like that you brought up the underage 18 versus 18 and older issue this is not just an underage 18 strategy you may be talking about helping your grandkids launch in this strategy you might be helping your kids that are 18 and older catch the vision of savings it is never too late so please know that the whole
(09:53) family can be involved in this Venture of saving saving saving saving we are so bad at As Americans and we want to help you pass on this Legacy of frugality and financial literacy and wisdom when it comes to Building Wealth it and it’s just such a fun conversation to have and maybe your family board meeting based on your small business structure another topic we talk about a lot so step one opening the account step two is funding it yeah yeah and on the open account too if that is a child over AG 18 or grandchild they’re just going to open up
(10:27) a regular Roth IR account just use that that Roth area account application now in either event the account needs to get funded and so typically this is going to be a new contribution which the amount of $7,000 so you can be throwing in a $7,000 contribution now remember that contribution can only be up to what their earned income was so if they made only three grand in the year even though you can go up to seven we’re just going to be dropping in 3,000 bucks is their contribution for the year and I want to remind you again don’t stress out about
(10:55) a child not having a W2 or not having a 1099 a 99 for a child under age 18 is a nightmare that’s something we would never recommend and so be thinking about the kids doing a 1040 easy just to establish it on record that they had to earn income they’re not going to pay tax with it it can to be a very very simple little tax return but it kind of just rubber stamps the fact the kids had earned income again just doing babysitting down the street could be on the 1040 EZ and let me say this we do not require that at directed Ira so when
(11:26) you are making the contribution you are certifying that the individual whether this is you or your kid had the earned income some companies that do kids Roth IRAs require you to submit a W2 or a 1099 showing that the child had the earned income we’re putting this on you we know many family businesses will pay their kids through the family business there’s no W2 required there’s no 1099 issued or required and a lot of times they’re not even filing at 1040 and because they’re under the standard deduction so there might be reasons to
(11:53) do it like Mark said do the E get it on record make it tidy and clean um but I’m just saying it’s not re wired when you’re doing it with directed Ira might be helpful recommended but not required absolutely now step three is now investing the account and this is where it gets exciting because again at the law firm our sister company KK loers you might have a family Zoom call even if the kids are at least 12 14 years old having them in a call with another lawyer how interesting is that and talking about hey we’re going to create
(12:24) an LLC and we’re going to fund this LLC with the kids Roth accounts maybe a health account your old 401K maybe you’ve rolled that over to a Roth here at directed Ira as well transferred another Ira in this is the beauty of family investing and they may only be a 2% owner in your next LLC but it’s something and that’s the beauty of you investing in what you know bring your kids along for the ride see a directed Ira you’re driving the car at a normal brokerage house the stock broker is driving the car and you’re just watching
(12:56) in the back seat no you’re in the driver’s seat you’re driving and you get to choose who’s in the back seat it could be all the family members Roth IRAs and again all these other self-directed accounts and you could build really cool uh investment machine yeah we have a lot of clients that are very sophisticated investors or they’re very active Real Estate Investors and sometimes they drop $7,000 in a kids’s Roth IRA and they can go invest that account on their own they’ll go wholesale a property they’ll do transactional funding on a deal they’ll
(13:23) put a property and on a wholesale contract or sorry an option contract and so they can invest that account with $7,000 now that’s not me okay this is not Matt senson what he’s able to do with his kids Roth IRA they have to go in on deals with him or invest in other publicly traded assets so I want you to think about what works in your situation and for your kids and everybody’s a little different like I said we could be partnering up with them in deals to bring them in on stuff you’re able to do with greater pool of funds they could be
(13:49) doing their own deals if you have that deal flow and activity where you could be investing their accounts now finally a couple words of caution first I want to say it’s so important to stay the course this is not a one andone I’m just going to fund my kids account and I’m done it’s it’s gets to be a little unwieldy trying to invest just $7,000 create a a process here and a commitment that you’re going to be doing this every year for the next 5 to 10 years no matter how old your child is and you’re going to be investing as a
(14:18) family then you’re going to really get that snowball going down the hill and really start to see an impact in your overall wealth and the college savings accounts for your kids this is a big deal but it’s about staying the course staying patient and staying consistent yeah keep in mind when we’re talking about a Roth ir and when we think it makes sense is after you’ve already funded and maxed out your own accounts that’s the other word of caution yes your kids first put the mask on first exactly put your own mask on first okay
(14:46) even on the airlines they’re going to tell you that all right so but you need to be maxing out your your own retirement account first that is the first priority then think about after you filled those buckets of accounts for yourself and your own retirement and your spouse if you got one then we we want to go look at the kids and how can we max out theirs frankly that’s when you’re in the best position to help them and have some advice that is actually worth something is once you’ve been able to do that for yourself so don’t think
(15:11) I’m need to go rush and do this for my kid that’s 12 and I want to help them go to college have you done anything for your own retirement so that’s just the priority of things as you’re going through this don’t get that backwards um but we love the kids Roth account and we want to help make sure you have this option available to you we have so many business owners and family businesses this has been a great option for them so many people trying to teach their kids about investing and creating a legacy of wealth building as opposed
(15:37) to just let me pass on what I’ve built to you when I die can I just want add one more word of caution some of you out there might have competing voices and another one that might be out there is a life insurance agent trying to encourage you to use life insurance as the get all indol for your kids college savings now I’m not saying life insurance is bad I think it plays a role in wealth building and in death benefits for when we pass on but we don’t we don’t need to put our eggs in one basket I love the Roth IRA
(16:08) because you get to choose the investment if you’re H some financial difficulty you can back off a contribution one year if you see an opportunity you can invest and double down and do some investing together as a family you’re in so much more control life insurance is a commitment that requires consistency far far beyond the commitment to do with Roth IRA and life insurance has a it’s all of its other pros and cons so try to use a multi-prong Approach at the least we’re not saying one is always better than the other but some people might and
(16:40) so be careful when anyone is trying to get you to just do one thing and one thing only look at their motives yeah now as this podcast is dropping right now I want to remind everyone that school’s out for summer school out for summer man I love that and let’s get our kids involved in something maybe one of your kids has a summer job or something so this is a great opportunity to take advantage of it now get them thinking about it get you engaged in the process we have some discounts of course of direct at Ira for doing this over the
(17:09) summer so uh thanks everyone for listening we hope you’ve learned something about the benefits of the kids Roth IRA for your kids and we’re here to help yeah thank you so much and this topic of learning how to hire your kids in your business is something we have talked about over and over again on our sister podcast please get over to Main Street business podcast you’re going to see podcast after podcast on the topic of hiring children under age 18 over age 18 this is a chapter in my book the tax and legal Playbook so there’s a lot to
(17:40) learn here that’s really again simple to implement and not enough accounts are talking about it I’m out there trying to get our tax Pros around the country to talk about hiring their children and building these accounts so buckle down on this and I promise you it’s going to pay huge dividends see you next time