Set Your Kids Up for Life & Get a Tax Break! Roth IRA Secrets for Entrepreneurs

Summary

Earn Your Leisure Podcast: Set Your Kids Up for Life & Get a Tax Break! Roth IRA Secrets for Entrepreneurs

Episode Overview: In the March 19, 2025 episode of Earn Your Leisure, hosts Rashad Bilal and Troy Millings delve into strategic financial planning for entrepreneurs aiming to secure their children's financial futures while reaping significant tax benefits. The episode meticulously breaks down the advantages of Roth IRAs, traditional IRAs, and the unique opportunities available when employing your children within your business.

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1. Introduction to Retirement Accounts for Entrepreneurs [01:37]

The episode kicks off with Financial Advisor 1 introducing the concept of retirement accounts tailored for entrepreneurs and their families. Emphasizing the importance of early financial planning, the advisors set the stage for a comprehensive discussion on Roth IRAs and their potential to create generational wealth.

Notable Quote:

"You want to start with this, the Roth IRA."
— Financial Advisor 1 [01:37]

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2. Traditional IRA vs. Roth IRA: Understanding the Basics [01:42 - 05:38]

Financial Advisor 1 differentiates between Traditional IRAs and Roth IRAs, highlighting their distinct tax benefits. While Traditional IRAs offer immediate tax deductions with taxable withdrawals in retirement, Roth IRAs allow for tax-free withdrawals, making them a compelling choice for long-term financial growth.

• Traditional IRA:

  • Tax Benefit: Contributions are tax-deductible.
  • Taxation: Withdrawals are taxed during retirement.

• Roth IRA:

  • Tax Benefit: Contributions are made with after-tax dollars.
  • Taxation: Withdrawals are tax-free in retirement.

Notable Quote:

"The benefit with the Roth IRA is that the money's tax free when you take the money out."
— Financial Advisor 1 [02:25]

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3. Employing Your Child: Tax Benefits and Requirements [02:59 - 05:38]

The advisors explore the advantages of employing your child within your business. By doing so, entrepreneurs can offer their children a salary, which serves as income eligible for Roth IRA contributions. This strategy not only provides tax deductions for the business but also generates tax-free income for the child.

Key Points:

• Employment Criteria:

  • Children must be between 7 to 17 years old.
  • They must perform legitimate, functional duties within the business (e.g., sweeping, cleaning).

• Financial Benefits:

  • Tax Deduction: Employers can deduct the salary paid to their child.
  • Tax-Free Income: Children do not owe taxes on their earnings up to a specified limit.

Notable Quote:

"Instead of giving them allowance... you get a tax deduction. You save money on taxes and it's tax free."
— Financial Advisor 1 [04:06]

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4. Maximizing Roth IRA Contributions for Children [05:38 - 09:26]

Financial Advisor 1 outlines how contributions to a Roth IRA can exponentially grow over time. By contributing up to $7,000 annually (the current limit) and leveraging compound interest, parents can set their children on a path to substantial wealth accumulation by the time they retire.

Key Insights:

• Contribution Limits:

  • Up to the amount earned by the child, with a maximum of $7,000 annually.

• Investment Growth:

  • Assuming a conservative 10% annual return, a $7,000 yearly contribution over six years (ages 12-17) could grow to approximately $3.5 million by retirement.

• Compound Interest:

  • Demonstrates the power of money growing over time without withdrawals, embodying the principle often called the "eighth wonder of the world."

Notable Quotes:

"If you invested that money 10% a year untouched... you will have $3.5 million."
— Financial Advisor 1 [07:22]

"The one thing that we know about the stock market is that it is going to appreciate 82% of the time over the course of the market's history."
— Financial Advisor 2 [07:24]

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5. The Power of Deferring Gratification and Compounding Returns [09:26 - 12:20]

The discussion shifts to the societal implications of retirement planning and the freedom financial independence can afford individuals. The advisors stress the importance of starting early, allowing investments to grow unimpeded by the need for immediate access, thereby fostering long-term financial security.

Key Takeaways:

• Retirement Preparedness:

  • Mitigates reliance on potentially diminishing Social Security benefits.
  • Enables entrepreneurs and their children to focus on entrepreneurial ventures without financial constraints in later years.

• Flexibility of Roth IRAs:

  • While intended for retirement, early withdrawals are possible (with penalties) for significant financial needs, such as starting a business.

Notable Quotes:

"This is not something that's hypothetical... $3.5 million tax free money."
— Financial Advisor 1 [08:28]

"Just like life insurance is the easiest way, but this is another damn near guaranteed way to make your child a multimillionaire."
— Financial Advisor 1 [09:26]

"You could take money out of the IRA whenever you want... but it's better to wait because you pay no tax."
— Financial Advisor 2 [10:30]

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6. Practical Examples and Encouragement for Action [12:20]

The advisors conclude by reinforcing the simplicity and efficacy of starting a Roth IRA for your child. They encourage listeners to utilize financial calculators to project potential growth based on varying contribution amounts, emphasizing that even modest yearly investments can lead to substantial financial rewards.

Key Recommendations:

• Use Financial Tools:

  • Leverage calculators to understand potential future values based on different contribution levels.

• Start Early:

  • Emphasize the importance of beginning contributions when the child is of working age to maximize compound growth.

Final Thoughts: The episode underscores the transformative potential of strategic financial planning through Roth IRAs and employing children within one's business. By integrating these approaches, entrepreneurs can not only benefit from immediate tax advantages but also lay the groundwork for their children's financial prosperity.

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Conclusion: This episode of Earn Your Leisure offers actionable insights for entrepreneurs looking to optimize their tax strategies while investing in their children’s futures. By understanding and utilizing Roth IRAs, alongside legitimate business employment of young family members, listeners can create a robust foundation for generational wealth and financial independence.

Transcript

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[Financial Advisor 1]

So now let's go to, to number two. You want to start with this, the Roth IRA.

[Financial Advisor 2]

Now this, this is your will basket. I, I'm, I, I want you to cook and then I'm just going to like chef up on you. So the, the Roth IRA is another one of these strategies that we talk about that can be beneficial for not only for the adult but for the child. So there's a few types. There's the Roth IRA and then we have this traditional IRA and then Roth ira.

[Financial Advisor 1]

So traditional IRA is you put money into a retirement account and you get a tax deduction for the money that you put in, but it's taxable when you're in retirement. So IRA stands for Individual Retirement Account. That's what it stands for.

[Financial Advisor 2]

Right.

[Financial Advisor 1]

So people are familiar with 401K, that's what your job provides.

[Financial Advisor 2]

And a 403B if you work in some other same thing.

[Financial Advisor 1]

Yeah. But if you want to do it for yourself as a Self employed person or just a regular, you know, employee, you can do an ira. An IRA is an individual Retirement account. So the regular individual retirement account is what we just described. And then there's a Roth. The Roth ira, you're able to put money in for your retirement, but you don't get a tax deduction. But the benefit with the Roth IRA is that the money's tax free when you take the money out. So one of the good things with being an entrepreneur is that you can employ your child. We talked about this before.

[Financial Advisor 2]

Yep.

[Financial Advisor 1]

But even if you don't employ your child, you can set up a Roth IRA for your child as long as your child is working. So this year, how much money can you pay your child?

[Financial Advisor 2]

This year I think we got up to 14. 300. 14,300. So that and I, we get this question a lot and a lot. And yes, I'm glad that people are asking the question of like, can I. The child has to be of working age. So if you have a two year old that is not classified as a working age, I believe the working age is between 7 to 17. And they have to be doing something that's functional. We work in, in a platform that actually has function. Right. So for my son, right. When we actually record, he'll come down, he'll set up, he'll sweep, he'll clean the area. That is an actual functional duty that he is doing to help the business. So if you don't have a functional activity or a purpose for it, then it makes it tougher. But it has to be between the ages of 7 to 17. You can't have your 3 year old performing a function. Or maybe you can, maybe you got a supercharged, but that's the age range.

[Financial Advisor 1]

So the benefit, okay, so the benefit with paying your child is that it's a tax deduction for you as an entrepreneur for your company and is tax free income to your child up to that amount. So if you pay a child $10,000, right. Instead of giving them allowance. Right. Because now when you give somebody allowance that's after tax money, you've already paid taxes on that money. So if you've given them allowance to buy sneakers or to, you know, do whatever, you don't get any benefit for that. But as an entrepreneur, if you can give them $10,000 or 5,000 or whatever you're giving them and it's salary now, you get a tax deduction, Right. You save money on taxes and it's tax free. They don't have, they don't have to pay taxes on that income. So that's beneficial for any entrepreneur. Now, where the Roth IRA thing comes into play is that you can contribute to a Roth IRA or an ira, but we'll talk about the Roth IRA for now. What you can contribute to a Roth IRA for your child that's working up to the amount that they're actually getting paid. So if they, if they have a regular job, they work in CVS and they got paid $5,000, then they can have a Roth IRA up to $5,000. If you pay them. If you are an entrepreneur, you pay them $5,000, then they can contribute up to $5,000. Right? So the limit for this year is 7,000. 7,000.

[Financial Advisor 2]

7,000.

[Financial Advisor 1]

That's the most. Right. So, okay, this is beneficial for people to know and understand because once again, it's just relatively short periods of time that could lead to large monies over the course of time. So if you are an entrepreneur, right? And you, you, you have a business and mind you, you can be an entrepreneur and still have a job also. But if you have, if you're an entrepreneur, you have a business, let's say that you, you, you paid your child $7,000, right, for the year. Now you can, that's a tax deduction. You're going to save money, $7,000 on your taxes. Now you can take that $7,000 and put it into a Roth IRA. Now, the benefit with that is that now the money is actually invested, you invested in the stock market. So let's just use an example. Usually working age is around 12. So if we pick the ages from 12 to 17, because 17 will be probably their last year in high school. And then, you know, after that point, they're, they're an adult, 18 years old. So you, you, you go from 12 to 17, which is six years, right? Let's say that you put $7,000 in to a Roth IRA every year for a child, mind you, you're getting a tax deduction for this money Anyway. You put $7,000 away every year for six years, right? And let's say you invested it in QQQ, right? Historically, over the last 15, 20 years, think it's average over 10%. So we can use 10% as something that should possibly be a realistic number.

[Financial Advisor 2]

And that might be conservative at this point.

[Financial Advisor 1]

So let's say you invested that money 10% a year untouched. Because the thing with the IRA is that's for your retirement, right? So when they retire, they'll have $3.5 million. So the benefit with that is that you already made your child a multimillionaire in their retirement. Now to push back for some will say, okay, well, the child has to wait till they're 60 years old to get it. Well, my question is, if somebody had a million dollars, 2 million or $3 million for you right now and said, and you're 40 and said, at 60, you will, you will get this money, would you be mad? And you, you did nothing for it. A couple of years of work when you was a child, would you be mad at your grandparent for doing that? Or would you look forward to that opportunity? And mind you, you can take money from a Roth IRA earlier than that. There's some penalties that you have to pay, but you don't, you don't have to wait till you're 60.

[Financial Advisor 2]

You don't have to wait till you're 60. And again, this is a conservative number, right? So we're talking about, there's years, obviously we saw over the past three where the, the QQQ was trash to technology sector has gone up 25%, right? It's going up 26 and then it's going down to 12. If we just take those averages over the past five years, you're going, you're talking about way more than 10. The one thing that we know about the stock market is that it is going to appreciate 82% of the time the S P has increased over the course of the market's history. And so 10% is a conservative number. So you're saying 60, but that number could hit 3 million by 50. Right. And so it's all about deferring the gratification, right? Just knowing that it's there and letting it compound like it is the eighth wonder of the world for a reason that money doesn't get touched, you'll be a millionaire. This is not something that's hypothetical. At that number, at a conservative 10%, that's what it's going to average.

[Financial Advisor 1]

And it's one of these things that it's not even, it's, it's, it's just basic math, right? This is, that's like life insurance is the easiest way, but this is another damn near guaranteed way to make your child a multi millionaire. Now, once again, we never said, when we said make your child a millionaire, we never said there's gonna be a millionaire tomorrow. But once again, we talk about generational wealth. So the whole point of it is that the child should be equipped to be earning money to be doing things as an adult, right? Everything that they're given is extra add ons for them. Right. So this isn't like the only thing that they should be like relying on as a 25 year old. But like I said, if you can. One of the biggest problems that we have in a society is retirement. Retirement. And they're already talking about cutbacks on Social Security. So if you don't have to worry about retirement, how much more free? I know people that take jobs just for retirement benefits.

[Financial Advisor 2]

Yep.

[Financial Advisor 1]

You work a job for 30 years just because it has a good pension.

[Financial Advisor 2]

Yeah. People will retire and go back to get a part time job because they need the insurance.

[Financial Advisor 1]

Yeah, sure.

[Financial Advisor 2]

And here's the thing, right? Like yeah, 50 sounds, if you're sitting in your 20s and your 30s, like 60 sounds like a long way. Like we just, I just turned 40 three years ago. You just turned 40 a year ago. At that same rate, you're still at that 10%. Right. Just from those five years, from 12 to 17, that 10 compounded turns to nearly 600,000 by 40.

[Financial Advisor 1]

Yeah.

[Financial Advisor 2]

Like what did you get a $600,000 check at 40? I might have missed it. No, wasn't sitting there for you.

[Financial Advisor 1]

So yeah, $531,000 by 40. So like I said, you don't, it's not like a locked up in a trust. You could take money out of the IRA whenever you want. You'll pay, you'll pay a early penalty if you take it out before your retirement. That's important to notice. But if you need money like let's say you've got a brilliant idea, you want to start a business, you can take the money out. It's never been taxed before. So you pay tax, you'll pay taxes on it, you'll pay a penalty tax. But ideally it's better to wait because a, you'll pay no tax and that, and like I said, keep in mind that money at 63.5 million is tax free. So when you get your 401k, you're paying state and federal taxes on it. So your million dollars is really $600,000. This is $3.5 million tax free money. So I mean that's just, that's just the tremendous. And like I said, for a very short period of time, you just, you paid $7,000 a year for six years. And that could be, no, that could be 2,000. Of course it's going to be a lower. But you know, you could use the calculator to see, okay, If I put $1,000 in, if I put $2,000. And if I put $1,500 in right, what does that equal? But the bottom line is that relatively small amounts of money in a short, relatively short period of time equals huge amounts of money later on in life.

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