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Tax Smart Real Estate Investors Podcast
378. The Truth About Paying Your Kids Legally (And Whether The IRS Cares)
00:31:45
Can you legally pay your children through your bu…
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Tom Castelli
You're now listening to the Tax Smart REI Podcast, the number one tax podcast for real estate investors,
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Podcast Host / Announcer
your source for all things real estate, accounting and tax. Here we reveal our secrets that can save you thousands in taxes, streamline your accounting process, and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors, and current clients on what strategies they use to grow their business and how they steer clear of Uncle Sam.
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Tom Castelli
Hey everyone, thanks for tuning into this week's episode of the Tax Smart REI Podcast.
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Today we're going to be talking about
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paying your children and helping them build wealth during their childhood, right? What if you could pay your children to work in your business and build wealth before they even graduate high school? How much better would you be setting them up for success? We'll also be touching on Trump accounts today as well, so we'll be diving into all that in just one minute.
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If you own short term rentals or you're thinking about investing in them, this is worth paying attention to. A lot of investors miss out on tax savings simply because they don't fully understand how the short term rental tax rules work. That's exactly why we put together our short term rental Tax strategy bundle. It includes a short term rental tax strategy white paper that explains the rules in a clear, practical way. We also included a material participation guide to help you better understand how to qualify for the tax treatment many investors are aiming for. It's designed specifically for short term rental owners with straightforward guidance on how you
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can actually use it.
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If you want to get a better handle on how this strategy works and whether it applies to you, check it out. Go to www.therealcpa.com str tax- bundle to get the short term rental tax bundle today. You can also check it out using the link in the show notes this episode. That's all for now. We'll be diving right back into today's episode.
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All right, all right. So this is a question. We get a lot, a lot of talk about this and a frequently asked question is, can I pay my children with my business? How do I do it? So on and so forth. So we'll first just kind of start off with breaking down. Why would you want to pay your children to work within your business to begin with? What are the tax benefits? Why would you even want to do this? Why are we even talking about this? So do you want to kick us off here, Nate?
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Nate
Yeah. The reason why is all you real estate investors know is because time value of money, the compounding of Savings, right? That's effectively what it comes down to. And so the question then becomes, okay, great, how do I do that in the most tax efficient or tax free manner? And so everyone says, well, Roth IRA accounts are fantastic, right? Because Tom, you take after tax money and put it in there and it grows tax free, meaning you never have to pay a dollar back to the IRS or the government ever again. And so people want to figure out how to do that for their kids. Here's the only issue, Tom, is you can't do that for anyone that does not have earned income, right? What's earned income? That's basically you're being paid A W Tier 1099. Well, there didn't always used to be these laws, Tom, but nowadays there's laws as you can't employ a nine year old in a business, right? It's this child labor laws that keep everybody from being able to hire some kid from working in the business. So it actually makes it really difficult to stick this money into a Roth IRA for them.
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Tom Castelli
So one of the things though, one of the ways around this is that if the child works for one of their parents or both their parents, then you can get around these labor laws, right? So the way this strategy works is that you hire your children within your business to do legitimate work that to be performed within your business and you get a deduction for the amount that you pay them. So you get to write that off on your taxes. And now your child has earned income, earned income that they can use to put the money in a Roth IRA if that's what you choose to do. You don't have to put the money in a Roth ira, but there are benefits to doing that, which we'll talk about here in today's episode. But the premise starts off with that if you hire your children to work within your business, now there's some caveats. It has to basically be a sole proprietorship owned by either you or your spouse, all right? And it basically cannot be an S corporation. If it's an S corporation or it gets a C corporation too, then you're not employing them directly. You're now the S Corp or the C corporation is now employing them. So it has to be through basically a sole proprietorship. And when you do that, not only are you going to get the deduction, but if you're paying them under the standard deduction, they're not going to have to file a tax return, assuming that's their only source of income. And B, they're also going to not gain exposure to the self employment tax themselves.
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Nate
You hit it all the time. I think it's like really important to know is like, look, doing the S corp is not a good strategy there. Like you said, that's like don't avoid that anything A corp in Inc. Whatever, right? It's like don't make that S Corp election. Avoid all that stuff. So don't do that. Also, like you mentioned, hey, that's the loophole that I was talking about before is that like, hey, as long as the parents own the business, obviously you got to check these state by state to make sure. But most times it's okay. At least federally it is. And then you can pay your kids to work in your business. Now this is the kicker, Tom, this is the kicker that would always come to you. And they go, great, I'm just going to pay my kids. I think the standard deduction right now is $16,000. Basically I want to pay them $16,000 and stick what's left into a Roth IRA. I get the tax deduction of my business. Amazing. Super easy. That's all I have to do. Is there anything else on their time or is that pretty much it?
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Tom Castelli
Yeah, no, I mean there's more to it than that for sure. You have to pay your child a reasonable wage for the work that they're doing within your business, right? So let's maybe start with the type that your child could likely perform within your business. Now this is obviously not comprehensive list of everything which is common things that a child would typically be able to perform. And of course it depends on their age and what their capability is. And then we'll get into a little bit about how much you should pay them and how that works because just stroking them a check for $16,000 with nothing behind it, that's a recipe to get scrutinized by the irs. If God forbid, you are ever audited, they could poke that apart. How'd you come up with that number? Show me the work that was done right. So common jobs that your children can typically do include things such as, but again not limited to social media, content creation, office organization, cleaning and administrative work. Modeling for marketing materials. That one's always an interesting one. Video editing, filing and scanning, packing and shipping, website testing. These are just a few examples. Nate, I don't know if you'd want to add anything in there. If you have any thoughts or comments
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Nate
on that, it look like you got like what it's like what time Gen Alpha at this point, I think, I think it's like it's like the next generation coming up. Like the Gen Z's already in the workforce and everything, so. But in the world of AI, you can definitely have your kids use AI to help work in your business. Absolutely right. So a lot of times the kids are doing that. It's like they know how to get their foot in the door. They know how to work ChatGPT. They know how to work Claude and Gemini. They know how to use all those features. So doing that type of stuff, what you just mentioned. Absolutely right. Also, they'll say, any physical labor, too? I know my own dad had a couple single family rentals, and guess who got to do the artwork on those properties whenever a tenant moved out? I mean, it wasn't the landscaping company, it was me. I was the landscaping company. And I wish my dad had known about the strategy back then. It would have been really cool because he might have been able to start that old. That good old Roth ira. But he didn't. But we were free labor, and so me and my siblings were free labor. So he would then employ. Basically, we'd have us go do the mowing, the weed whacking. Right. Clean up. Right. If there's anything that need to be fixed to the house, we'd help him do that type of stuff. Stuff. So. So I. I would say physical labor. Right. If it's possible. That is the easiest in the world. I've talked to other clients. Like, their kids help them sweep and they help them clean up. Right. There's a lot of tasks now, the digital stuff, like I was just saying before, AI, Right. That type of stuff. So here's the one that I do want to talk about. The modeling. Everyone's like, oh, I just, like, take a couple pictures and I have $15,000. I go, great. It's like, as I've worked with clients go, great. You know, if someone hired little Billy down the street as well, would they also pay him $15,000? And they go, no. And they go, okay, then why should your kid get paid $15,000? And that's just a conversation to have is the thing. Like, you have to do something that is comparable in the market and reasonable in the market.
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Tom Castelli
Yeah. You basically have to pay your child as if they were a third party to do the work to make this legitimate. So to Nate's point, you're typically not going to pay a child model $15,000 or $16,000 to take a few pictures for your website or your marketing materials. It's usually far less than that. So that's across the board for any of this type of work. So now the next question is, well, how much do you pay your child? Right. And how much can you actually pay them? Well, I mean, there's different ways to go about this. The way that tends to make the most sense is that you pay your child an hourly wage and you multiply that by the amount of hours they work for you. Right. So what is an appropriate hourly wage? Well, you can back into it all different types of ways, but for, for most children, most likely in most cases, it's going to be the minimum wage is what's probably going to be appropriate for somebody of their age. I don't know how many children are working out there in the workforce for more than that. I know when I was a child or when I was 17 years old or 16, I got a job at the local shop, right, Doing, you know, grocery scanning. I was a cashier and I got paid minimum wage as a 17 year old. Now obviously the job that I was in was a minimum wage job, just for example. But the question you have to ask yourself, well, if you're not going to pay your child the minimum wage, what's your justification for paying them whatever wage you're paying them? How would you determine that? And there's different ways to determine that. But what are your thoughts on this, Nate?
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Nate
Yeah, I think around the range that we think it's eligible for several tax court cases, the earliest you can probably start doing it is around eight years old, to be honest with you. Right. That's the earliest. And look, maybe your 8 year old's a genius or next Einstein. You're probably not gonna be able to pay them if there's high schoolers. Like if Thomas Castelli is only getting paid minimum wage at 17 years old. I'm sorry, your 8 year old probably can't get paid more than minimum wage at 8 years old unless they're doing something, some super high functioning task, in my opinion. Yeah.
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Tom Castelli
And if that was the case, you have to go to figure out, okay, well, what would someone be paid for in the marketplace? What would be the hourly rate, for example? You'd pay that type of person to do that type of thing in the open market.
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Nate
Market.
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Tom Castelli
And at that point, if you can justify something higher than say, minimum wage, then perhaps that's reasonable. I mean, you should probably still have a conversation with your CPA to make sure that that is indeed reasonable and get like a gut check on it. But the bottom line is you have to pay them the market rate for the work that they're doing. And for most children, in most cases, just to keep things simple here, it's probably going to be the minimum wage.
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Nate
Yep. Yeah, I totally agree, Tom. Unless they're like super advanced, doing your own property management that you'd pay 10% of rents to, then it's probably not going to happen in my opinion. So just FYI there, But the next one we're talking about, Tom, is entity structure. What is our recommended entity structure here?
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Tom Castelli
Yeah, so again, in order to pull this off in full force, in order to make sure your children aren't exposed to the Social Security tax, the Medicare tax or the FUTA tax. So okay, fica overall it has to be a sole proprietorship or husband and wife partnership. So that typically means like a single member llc. Maybe there's no llc, you're just doing business as a straight sole proprietary proprietor. Or maybe you have a partnership between you and your spouse. Those are appropriate entity structures in order to make this entire thing as tax efficient as possible. When you enter in like an S corporation into it, the payroll treatment is different and you're basically not going to be. If you are using an S corporation, you could still pay your children through the S corp, but now they're going to be subject to the self employment tax. Okay. And same thing if you're paying your children actually via 1099, which is why you have to pay them a W2 wage as well. That's important to note.
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Nate
Yeah, Tom, like I can't tell you number of times I've seen people who came to us like yeah, I heard about the strategy. So we started paying our kids and then they got 1099s. It's like, oh well, unfortunately there's like this is the whole ruined part of the strategy. And so I guess kind of circling back a little bit, why is it so advantageous to do it with this entity structure? The reason why is because if your kids are employed by the parents, then you don't have to pay Social Security tax, Medicare, futa. Right. You don't have to pay any of that. That is totally excluded. Now one thing I didn't mention is state. You'll have to double check that yourselves because most states have a suita exemption if you're employed by your parents. Right. Most like I would say over probably like 60% of states. But there's a couple out there that do actually still require if you put them on payroll and you still might need to sign them up for a suta. Right. I will say in my personal opinion, it's probably still worth doing. State income tax is generally just like a threshold. There's like federal income tax. Just double check those too. But for the most part, as long as you're paying them under that $16,000, the only form you're going to have to file, and this is actually a gray area, a lot of people are unsure about this. But I'll tell you what we think. You've got to file a W2. In my our personal opinion, you file a W2 January 31st. That's it. That's all you have to do each year. So just FYI on that. And that's why it's so much a business. Better planning opportunities, almost no paperwork, no payroll filings or minimal at least. And you get the tax deduction and you get to toss it into the tax savings for that.
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Tom Castelli
There we go. That is how that works.
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Nate
Are you a real estate investor, business owner, or high earner who feels like you're paying way too much in taxes? The problem usually isn't you. Most accountants are generalists. They don't really understand real estate. Complicated income situations or don't work with you on strategies that lower your tax bill? We do. We work with real estate investors across the board. Long term rentals, short term rentals, multifamily commercial syndications, you name it. We'll help you get every deduction you're entitled to and, and help you grow your portfolio without the tax drag. For you business owners, we help you stop overpaying the IRS and start building real wealth with the money you earn. Highest cost you'll ever deal with is taxes. If you're a high earner. We go way past the basic W2 stuff. There are legal ways to bring down your tax bill and most people have never heard of them. We also work with syndicators, developers and agents on complex deals most CPAs just aren't handling. This isn't just you're filing your return once a year. It's a real tax strategy built around what you want to do in your life. If you're ready to work with people who actually get it. Let's have a conversation. Request a call in the link in the show notes.
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Tom Castelli
Now we're looking at the other side of this, right? So when you pay your children, you have to give them the money. Of course, it goes into their bank accounts. Now, your children could do whatever they want with the money, whatever you allow them to do with it. That's totally up to you. You don't have to put it in a Roth ira, but A lot of people combine this strategy with the Roth ira because now that your child has earned income, they could put up to $7,000 per year under the current law away in a Roth ira. And when you put the money in a Roth ira, there are some good tax benefits. First, the contributions, if invested, will grow tax free within the Roth IRA account for as long as the money is within that Roth IRA account and then withdrawals. There are some interesting things you could do here. First, the contributions. So if you put $5,000 in or you put $7,000 in, for example, you can take that $7,000 out and there will be no penalties, no taxes due. You always take the contributions in and out of the Roth ira. However, there are some ways that you can take the earnings out tax free or penalty free in some cases. So if the money goes towards qualified education expenses, like for example college tuition, for example, then that money is penalty free. So in other words, your child could take the money out of their Roth IRA to pay for qualified educational expenses and, and they will have to pay taxes on it, but they will not have to pay penalties for withdrawing it out. They can also take up to $10,000 out of the Roth IRA to pay for their, their first primary residence. So it is, there's a lot of flexibility in terms of what you can do with this Roth account. You could also use it just as an early retirement vehicle. Imagine your child gets a 10 year head start or an 8 year head start on their retirement account building. Then they can be in a very good place as they kind of move forward through life.
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Nate
Yeah, Tom, I've actually done the math on this just to see, I was curious and let's say you do minimum. I think the number I use, the number I did use was $3,000 a year. So I did $3,000 a year from like age 8 to 18. That's when you have to stop, right? Once I turn 18, you can no longer employ the W2 strategy where you don't pay any payroll tax. You got to flip into 10, 99 other situations, things you can do there if you want to, but if you do that, basically 10 years of contribution, they will have a seven figure account by the time they retire. That's including inflation and just like normal standard S&P 500 investing, like 8% average, something super small, they will have a seven figure retirement account built up for them just by building this over time. That's all you have to do. And to be honest, that's incredibly powerful and should absolutely be considered by Everyone who has rental properties, businesses, etc. And that's why we don't want to blow it up by going too aggressive. Right. My favorite phrase that I've heard from multiple people in the tax world is pigs get fed, hogs get slaughtered. We don't want to be overly aggressive and just go, hey, we're just going to do $16,000. You don't have to do that. Obviously your returns will expand for sure. But then if you get audited, you lose the audit lottery and you get selected, that's just going to create big issues, in my opinion. So by being standard and by attempting the strategy that creates a massive wealth potential for you and your kids in the future.
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Tom Castelli
Absolutely. So yeah, if you have children and you have a business or you have rental properties, definitely something a conversation to have with your CPA or tax advisor to see if this is something that you can implement. Because again, you get a deduction on your tax return for paying your children. And then if you follow the rules, you do everything the right way. Your children are receiving the money tax free, they're not paying the self employment tax and then they're able to tap into the savings vehicle, the Roth IRA for all the benefits that we just discussed. So we're also going to be talking about Trump accounts in just one minute, but we actually have a quick video that we're going to review here on the episode related just to exactly what we're talking about here. And we'll also talk about, during the video we will talk about how much is actually reasonable to pay your child.
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Nate
So why are we sharing this? Right? Like what's, like what's the benefit in sharing this with you guys? And here's, in my opinion, here's the benefit of sharing it. Right? Just FYI. So this is a well known tax promoter who likes to talk about different tax strategies and does not talk about how legitimate there is. Right?
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Guest Expert / Tax Promoter
So put money into a Roth IRA. Put $6,000 away for your children every single year. That's what put them on payroll some way.
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Tom Castelli
Pay them something, pay them for doing chores.
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If you put them, if you put
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Guest Expert / Tax Promoter
your child on payroll, you can pay your child up to 15, 750 without your child needing to file a tax return. That's a 15,750 deduction. Then from the 15,000, 7:50 you could take 6,000 of it and stuff it into the Roth IRA money that neither you or the parent paid taxes on. And that money's growing tax free. Yeah, that's it.
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Tom Castelli
Absolutely.
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Guest Expert / Tax Promoter
Be the mission for families.
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Nate
All right. And so is what he said technically wrong? I don't think so. That is, I actually do think. I think the $15,000 number is a 2025 number. So that's old. So it's actually not applicable. The new number is 16,100. So that part is kind of wrong. But what he's actually proposing is incorrect and actually going to get you to lose with the irs. And why is that? Tom and I went through the math before this episode and like, figure out, okay, what would that look like if you employed your kid for, let's just say, 15 bucks an hour, right? We'll say that's the minimum wage. We all know every state is totally different from a minimum wage perspective. Let's just say it's $15, right? So if you're going to pay your kid $16,000, 60,100 divided by 15 bucks an hour, that means they're going to be working 1000 hours. In your business, Tom, that's a lot of hours from a 9 year old, don't you agree? Yeah.
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Tom Castelli
So a thousand hours, if you were to even it out over 52 weeks, a full calendar year, that would be roughly 19 and change. So roughly 20 hours per week, let's just call it. All right? And question is, is your 9 year old actually going to be able to work 20 hours for you every week of the entire year in order to actually, you know, get to that $15,000 number? That's the question. And, you know, I don't have kids, but I would say to have a kid work 20 hours per week, which would be roughly, let's see, 20 divided by five. In a normal work week, it's four hours.
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Nate
Four hours. Four hours a day. Even.
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Tom Castelli
Even if they work seven days a week, you didn't give them a day off, it's still roughly three hours a day. Is it possible? I mean, theoretically, yes, but it's certainly an uphill battle, right? You can't just go around just stroking your kids a check for 15 or 16 grand and say, here's the money I'm paying you. That's the type of abuse that the IRS looks into and can challenge. You need to have some legitimate backup to how you kind of back into that number. So I think the premise we're trying to say here with this particular video is, yes, you should try to look for ways to pay your children within your business so you get that tax deduction and they can contribute to a Roth ira if that's what you want to do with the money. But the question is, is paying them 15 or $16,000, is that reasonable for the work they're doing? And again, if we're looking at the fact that most children or if we're looking at the case where most children will probably be getting paid the minimum wage, and if we just assume the minimum wage is $15 per hour, getting them to that 15 to $16,000 mark can be an uphill battle and something that it may or may not be defensible in front of the irs, unless you have really strong documentation and backup to prove that they actually did that amount of work throughout the year. So I think that's the crux of this one.
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Nate
Yep, I think it's crux. One more thing to add, Tom. They mentioned chores at the end. If it's chores related to your business, that's fine. That totally works. Like I mentioned earlier, physical labor, the best kind of work that you can document and show. If it's just chores like they're vacuuming your house and they're walking the dog and picking up the old poop from the dog in the backyard, that's not payable time. I've seen people talk about doing that. That is not legitimate, and that will not win in an IRS audit. And hopefully a CPA will not sign off on that either, because it's not legit.
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Tom Castelli
You could absolutely pay your children that clean up the dog, the dog droppings in your backyard, but you just can't deduct it on your taxes and it's not going to be considered earned income for them. Right. Because it's not tied to your business. Right? That might be correct.
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Nate
You're 100% correct. 100%, Tom. Yeah. Now, if they create a business, they're going to go pick up a bunch of dog, they're going to do it for the rest of the neighborhood. Hey, maybe we've got an opportunity here that we can use to work with that, but that itself is probably not going to work.
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Tom Castelli
Cool. So that is, there's a little bit about, you know, what's the reasonable amount you could theoretically pay your children? Again, it's, there's no, like, a hard answer on this, but you have to just look at it reasonably. Would a third party be paying your children that much amount money to do that type of work within your business? And how often can they actually do that work? How many hours can they actually put in that you can justify that type of work wage? So it's definitely a conversation to have your tax advisor and your accountant definitely don't just want to stroke a check to them for 15, 16 grand. Call it a night.
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Nate
Exactly.
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Tom Castelli
Having said that, we're going to move right into Trump accounts. The second part of this episode on helping your children build wealth. So Trump accounts are a new thing that was introduced under the one big beautiful Bill act. And we'll go ahead and break that down. Nate, do you want to take us away on the Trump account?
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Nate
Yeah, absolutely. So, I mean, like my favorite joke was to say that like this got passed so that you could ruin your Thanksgiving because then you have to say Billy's Trump account. And then everyone would just go into a tizzy because whenever you say the word Trump, you never know the kind of reaction you're going to get with everybody. Right. That's not political. Who knows? Who listening right now who's having reactions to what I'm saying? But why do we talk about it? Why do you think it's important to talk about, despite the political naming around it? Because this is an easy wealth building strategy for your kids right now that you get to start using all that stuff that we just talked about about the IRAs, about trying to pay your kids, making sure, all right, it's legitimate. Well, guess what? Imagine if the government just said, hey, you can start contributing it to your kids without having to worry about all the other extra stuff, right? And you go, oh, wow, yeah, I'd rather do that. Well, that's what Trump accounts are actually. They are precisely that. And so what does that mean? Right? So basically, if you have any kids that are under 18 right now, you have the ability to basically on July 4th of this year, well, whatever date falls after that, the government's going to allow you to start putting contributions into these accounts. Right. And so what are they? They're basically a pre 18 year old traditional Iraq. And they're going to only be invested into index mutual funds, et cetera. Maybe not the index funds, but at least the mutual funds basically only invest into the S&P 500 at a diversified rate. And they're going to allow your kids to basically you can contribute from basically the date they're born until they're 18. And you contribute up to $5,000 a year for each child. And if you have anyone that's born between 2025 to 2028, go me 2025, you get a free thousand dollars contribution from the government called a pilot contribution, actually. So it's really interesting, actually, that mechanic's really intriguing how that works. Basically, it's like the government treats as you got a refund for having that kid, they give you an extra thousand dollars tax credit and then shoved it in there for, for your kiddos. But that's basically just the government saying, hey, we want to provide more access to retirement accounts for these kids, more access to investments. So we're going to be doing it this way.
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Tom Castelli
So. And they could stack both of these, right? So they could work for their parents and have IRA and then also contribute can be made to the, this traditional.
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Nate
You can have your cake. You can have your cake and eat it too, Tom. Absolutely. It's one of the few situations where that, that happens.
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Tom Castelli
Well, I mean, I think the Trump accounts in my opinion are kind of like a no brainer. You don't really have to do much. You just have to have a child within a certain time frame and, and contribute the money to the accounts and you're good to go. And plus that, that thousand dollar refund or that thousand dollar contribution quote unquote that they're giving you to do it like it's free money. So you might as well take it and do this on your behalf and set them up for success. And you can do this if you have no business, right? So this is just open to anybody who has a child within a defined timeframe and can meet those requirements. And on top of that, if you can also pay your children working your business, why not do that too and really set them up for success. So there's definitely ways to help your children build wealth early on in their life. And these are two of those ways.
- [25:25]
Nate
Yeah, Tom. And I think the consideration people ask is like, okay, wait, what about a 529 plan or a Trump account? Which one should I do there? And I think it's an interesting question because a lot of people are trying to save for college for their kids or some kind like now the 529 plans have way more access due to Secure Act 2.0. They can be used for trade schools or anything of that nature. Right. Basically you're just helping your kids figure out how to make themselves more affordable in the world. Right? How to have skills so they can then go and pursue careers, be business owners, be really good doctors, lawyers, maybe even accountants. Right? This AI doesn't replace us. But basically in that timeframe, essentially you gotta weigh this. And I think if you can do both, I think it's the best strategy. Because 529 plans are specifically for college. You can roll them over to a Roth IRA once they're done with college, you have leftovers Basically. But the Trump account is specifically for their retirement and their nest egg down the road. And like Tom mentioned, they can use that cash tax free and purchase a first time home residence. Right. I don't think it's the best use of the money. Right. Because we talked about the long term growth that I just mentioned earlier where you can have a multi 5 to 5 or $7 million in that account by just by contributing a couple thousand every year. That's an amazing opportunity. But if they need the funds for that, that's another great way. They're taking advantage of that too. I also want to mention there's also for anyone that starts Trump account, I think it's $150 or $250 is being contributed into that by, I think it's like the Dell by the Dell CEOs. They wanted to make sure that they did that as well. So FYI, that starts this year on July, basically around July 4th. Time frame is when the government will be rolling those accounts out. You can do it. You can elect two ways. You can go to trumpaccounts.gov or either there's no S or there's an S. I can't remember which one exactly. Or you can elect it by filing your tax return. That's how we've done it for a lot of clients. We just filled out the tax return and had that done taken care of. But Tom, what are your thoughts? Any. Do you have any opinions on Trump accounts or Roth trumps 529 plans?
- [27:16]
Tom Castelli
Yeah, so I think it depends. I think the answer depends on what you foresee your children doing, you know, when they become of college age.
- [27:23]
Nate
Right.
- [27:24]
Tom Castelli
The 529 plan is primarily to save for their education. That's what the account is designed for. The 529 plan. You don't get a tax deduction at the federal level for making contributions to the 529 account. You might get some at the state level depending on your state. And also 529 accounts can be used for other expenses besides just college. Right. It could also be used for certain qualified education expenses, K through 12. So I don't think there's a right or wrong answer. It depends on the needs of your children, how you foresee that going. But if you foresee them going into college or you foresee them having those types of educational expenses that you can use a 529 account for and you have the resources to fund both, I would say just fund both in that case. Because the Trump account can be towards retirement, like you said. And Then also the 529 can be towards the educational expenses. So again, I don't think there's a right or wrong answer. I think it depends on you and your kid's situation. That's definitely a conversation that you can probably flesh out in a deeper way with your tax advisor to better understand what makes the most sense for you. You don't have to make that decision in isolation. You can have a conversation with somebody who. With a professional who can help you kind of get more clarity on that type of conversation.
- [28:30]
Nate
Yeah, I totally agree, Tom. I totally agree. So some important distinctions to make about the Trump accounts is the fact that once a kiddo turns 18, it turns into a traditional IRA. I know Tom and I have talked a lot about Roth IRAs today, but it does not automatically turn into that. However, you can make the conversion when they turn 18, right? Or have them make the conversion because now they have the access and control of the account. So just FYI on that, now they have total control of what happens with that, with those dollars. But what I recommend doing is then converting that to the Roth IRA at that point in time. Why? Because then it's going to get that tax free growth for the next 50. For the next, what is that, 41 years? Right. So they can retire at 51. That's insane growth. Sure, they can't touch necessarily right now, but they'll get access to. Right. The whole point of these retirement accounts is like, those are. That's a feature, not a bug. All the penalties that come with pulling them out contributions can be pulled out tax free. Any earnings though, if they pull those out. And that's what's taxed upon the rollover as well.
- [29:27]
Tom Castelli
All right, so these are just a few ways to build wealth for your children while they're in their younger years. Certainly not the only ways, but some of the key ways to have some tax benefits to it. So if you're considering paying your children within your business, if you're considering.
- [29:40]
Nate
Should I.
- [29:41]
Tom Castelli
Should you fund a Trump account? Should you fund a 529 account? Should you fund both? What your options are, how to piece all this together in a way that not only helps you and your children gain some tax savings, but also remains in compliance with the irs. We'd love to have a conversation about how we'd be able to help you do this and tap into other tax strategies that are available to you. You can request a free discovery call via the link in the show notes to this episode or on YouTube if you're watching on YouTube and we'd love to learn more about your situation, see how we can help. That's all for today's episode, and we'll catch you on next week's episode of the Tax Smart REI Podcast.
- [30:15]
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- [31:03]
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