Many of our clients have teenage children. We are often asked if they can pay their child, or a variation on this question - “Can my child open a Roth IRA?”
The IRS allows parents to pay a child up to $12,000 per year, with neither the parent nor the child owing any income tax. Parents who are self-employed or who own a business can also deduct the wages paid to their child. The rules also apply to children paid from an incorporated business, but those rules are more complex and we advise asking your tax professional for more details.
We recommend children contribute to a Roth IRA as soon as possible, putting the power of both time and compounding to work. One technique we suggest is to utilize a “parental match” to help incent saving, very similar to a 401-k company match. Here’s how it might work.
I pay my son Tyler $3,000 / year to work a few hours each week in my office scanning and filing. I tell Tyler that for every dollar he puts in a Roth IRA, I will match it, up to $1500. Since Tyler has $3,000 of earnings, he can contribute that amount to a Roth IRA. The money used to fund the Roth IRA needn’t be “his" money. In this case, Tyler has $1500 to spend as he wishes, $1500 goes into his Roth and I contribute $1500 to his Roth.
For a child that starts contributing the current Roth maximum of $6,000 annually at age 15, they’d have nearly $40,000 in their Roth by the time they graduate from college! There is no minimum age one must attain to start a Roth, only that the child have earnings.
We love to help instill sound financial habits – and for the children of our clients it’s never too soon to start!