You’re probably aware of the wonders of the Roth IRA and how it allows your money to grow completely free from taxes, even upon withdrawal. An added wrinkle is the lack of age restriction, so that even kids with earned income (wages, salaries, tips) can contribute to a Roth IRA up the lesser of their taxable income or $5,000.
Along those lines, I received a PR e-mail from a site called 1417power.com. The idea is that you pay them “tuition”, and in return they pay your kids official job income that makes them eligible to contribute to a Roth IRA. They claim to follow all applicable child labor laws for those aged 14 to 17 (thus the name). Your kids do thing like fill out marketing surveys, but you’re essentially buying them a job. Digging through their fee structure, roughly 50% of what you pay them is skimmed off to go to the site owners.
Naturally, my question was – why can’t I just do this myself? The idea of paying your kids to do things like babysitting, lawn care or landscaping work, or manual labor seems simple enough. However, this Fairmark article argues that paying your own kids for chores is usually not considered taxable income, so you can’t “switch it” to taxable income for Roth IRA purposes when it benefits you. I’m not completely convinced, but for the sake of argument let’s explore other options:
- Have the teenager earn money via traditional jobs like grocery bagger, cashier, food delivery, waiting tables, etc.
- The child earns income from other neighborhood families doing things like babysitting, lawn care, or painting. The pay rate would have to be at reasonable market rates. You could even work out a “I’ll pay your kid if you pay mine” agreement, if you find a like-minded parent.
- If you run your own business, you could pay the child for more clerical or administrative-type duties such as proofreading, delivering documents, or office organization.
- If the teenager is especially industrious, they could be doing more skilled work like graphic design or making iPhone apps.
There would still be some loss, as their gross income would be subject to payroll taxes like Social Security and Medicare, as well as a small amount of federal income taxes (less than 10%). But if your child has the discipline to not touch the money for decades, the tax-free growth could be enormous. You’d have to be comfortable with the fact that they could do whatever they wanted with the money at age 18 as they can withdraw the money after taxes and penalties.
The Parental IRA Match
Another move taken from this Forbes article for those that are already parents of teenagers with part-time jobs is to match their earned income. If little Jane earns $3,000 being a lifeguard, then let her spend her all or part of her take-home pay, but help her fund a Roth IRA to the full $3,000.
Effect on College Financial Aid
From my quick research, it appears that retirement accounts like Roth IRA are not considered an asset by the generic FAFSA form, but individual universities may deem them as a student asset. This could make for example 25% of the IRA to counts toward the student’s expected contribution, which doesn’t seem too bad.
Here’s a question for the parents out there – have you done anything along these lines? What did you do and why (or why not)?