136 | How To Fund Your Child’s Roth IRA And Other Tax Optimizations With The FI Tax Guy

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136 | How To Fund Your Child's Roth IRA with the FI Tax Guy
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ChooseFI Favorite: top rewards card for beginners

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A dive into taxes with Sean Mullaney, the FI Tax Guy.

Sean’s Career In Accounting

When Sean started out as a rookie accountant, he had a plan to become a partner in an accounting firm in his home state. However, he learned that it is difficult to move up the ranks in large firms so he started looking for other options.

As he looked around, he saw many exciting opportunities in Washington D.C. Although the jobs looked amazing, he knew that he would have to put in his time at the IRS first. After some research, he found that the way to find a job at the IRS was to go to law school.

Law School

After deciding that he wanted to go to law school, he started looking for affordable options. George Mason in Virginia seemed like a good option but Sean knew that he would need in-state tuition to make it an affordable choice.

Immediately Sean started applying for jobs in Virginia to gain residency in the state. After working in Virginia for a few years, he was able to obtain his law degree in an affordable way. Through in-state tuition and a scholarship, he was able to keep his student loan debt manageable.

George Mason University had a very interesting scholarship program. They way they did it was it was $5,000 for the first year… and then $3,000 for the second and third years each if you stayed in the top 15% of the class. So the scholarship was not automatic… but it gave you more incentive to study hard and do well on your tests.

Related: Demystify College Scholarship With Brian Eufinger

Landing The Job

After finishing law school, Sean was hired on at the IRS. Sean knew that putting in his time at the IRS would open the doors he wanted in Washington D.C. Eventually, he was able to land a job at a big 4 national office based on his experience with the IRS.

Career Paths In Accounting

As an accountant, you have a wide range of opportunities. If you are considering becoming an accountant, then you should realize that the starting pay is in the mid-five figures. At a smaller firm, the top end of the pay scale maxes out sooner. At a large firm, you could make your way to a six-figure salary.

There are so many different paths you can take whether that is on your own, in a small firm, big firm, or in industry.

Typically, a large city means a bigger salary. The real potential for earning comes in your promotions at an accounting firm.

Another approach to career growth as an accountant is to put in your time at a big firm. After a few years, you could make the leap to corporate America at a higher salary.

Accounting truly is the language of business.

Yet another approach is choosing to start your own firm.

Sean’s Personal Finance Journey

Although accountants deal with finances every day, according to Sean and Brad, that does not always translate into good personal finance choices.  Most accountants work with large corporations which do not require a background in personal finance.

Due to that, Sean’s personal finance journey started separately from his professional career as an accountant. After finding ChooseFI and learning about the building blocks of FI, he has been attempting to build those bricks into a solid financial life.

A Fully Funded Lifestyle Change

After many years in a traditional accounting career path, Sean decided to make a change. Over the years he had an increasing interest in personal finance. That interest turned into a desire to help individual clients with their financial and tax planning. In June 2018, Sean started Mullaney Financial And Tax which provides financial planning, tax planning, and tax preparation.

Sean was able to do this by saving up living expenses and funds to start a new business before making the leap. However, the change did not happen overnight.

Back in 2016, Sean started a training program in financial planning at night. He aggressively saved for two years before deciding to make this fully funded lifestyle change.

It’s been sort of a slow shift. With the money I’d saved up and some great support from my wife, Catherine, I’ve been able to execute this fully funded lifestyle change.

Since June 2018, he has had a busy professional and personal life. Between getting married, moving across the country, starting a blog, and getting all of the business licenses up and running the last year has been a busy one. Luckily for Sean, the career switch is not too farfetched, so he feels comfortable with the choice.

Related: Forget Retiring Early–Go For A Fully Funded Lifestyle Change Instead

Building A Business From Scratch

Before quitting his job, Sean was unable to build up a client base due to his work obligations. Since June 2018, Sean has been hustling to build a business from the ground up. He has built a blog, been on podcasts, talked to people in his local area, and tried several other approaches to get his message out there.

There is no one approach that will work in every industry, in every case.

If you are looking for ways to build your own business here are some suggestions from Sean:

  • Establish a blog with content that people can read
  • Take advantage of every speaking opportunity you get
  • Go to conferences
  • Find a mastermind group
  • Build relationships
  • Look through LinkedIn for people that might need your assistance
  • Find places where people in your field are meeting up
  • Find the places where your clients are meeting up
  • Visit your local Chamber of Commerce
  • Be active in your church
  • Be open about your career
  • Take action and get the word out there

First Client

Once you land your first client, realize that it is okay to be nervous. You might not have all of the answers for your client, but you can do the best job you can. Always give the best advice and service that you can give.

There are going to be some bumps in the road. On the entrepreneurial track, you have to be comfortable with being uncomfortable.

Do your best and help your client.

Related: When A Life-Sucking Job Forces You To Rethink Everything

FI Tax-Efficient Strategies

Now that Sean is focusing on a balanced career of helping people with their personal finance goals and tax help, he has done an extraordinary amount of research into tax-efficient strategies for our community. Of course, we cannot cover everything about FI and taxes today. However, these strategies will serve as a starting point for more conversation. Sean has graciously offered to provide more tax information for our community in the future.

As a reminder, Sean is not giving tax, legal, or accounting advice. You should consult your own advisor for assistance.

How To Fund A Roth IRA For Your Child

A Roth IRA can be an incredible vehicle for investment growth. If you have the ability to fund a Roth IRA for your child, that could be an amazing opportunity to help secure their future. The catch is that Roth IRA contributions must be based on earned income of the contributor. That means your child has to earn an income that is reported to the IRS in order to fund a Roth IRA.

If you have a side hustle or full-time business that operates as a sole proprietorship, then you may be able to easily fund a Roth IRA for your child while creating a tax deduction for yourself.

For example, if you run a small business, then you could hire your child to do a small job around the office. Whether that is cleaning up on the weekend or helping you make copies, you can pay them a reasonable wage with money that will be a tax deduction for you.

Presumably, your child would earn less than $6,000 for the year which will eliminate the need for your child to pay income taxes based on the standard deductible and they will also be able to avoid payroll taxes based on the rules. At the end of the year, you can add up their earning to a total “earned income.” That earned income is the amount that you will be able to contribute to your child’s Roth IRA.

Although the physical money put into the Roth IRA does not have to be the money earned in their paychecks, it cannot exceed the amount of money they earned in their paychecks.

Related: How To Open A Roth IRA For Kids And Teach Your Kids About FI

It is important to note that this structure will not work well for an S corporation. It is best for your own business that is a sole proprietorship on your schedule C. Also, every state has different rules so you want to double check that your child can legally work for you. In some states, you may need to get a special certificate in order for your child to work for you.

If your child earns money from other gigs like mowing the lawn or babysitting, then they will need to file a tax return on a schedule C or SE. By filing the tax return, they will have to pay payroll taxes but it would allow them to fund a Roth IRA with their earned income.

Related: How Kids Can Make Money And Get A Financial Jump Start

If you are interested in helping your child fund a Roth IRA from your side hustle, then the best place to start is by filling out a W4. At the end of the year, you will also need to fill out a W2. When the child files their tax return, then you need to attach the W2 to the front of the form. You can find these forms on the IRS website and they are not difficult to fill out.

Taking action on this tax strategy could be the most powerful vehicle for your child’s future.

Optimize Your Charitable Contributions

If you donate to charity, then you might as well do it in the most tax efficient way possible. In recent years, the new tax laws that raised the standard deductible have changed the landscape for tax itemization. Instead of itemizing their deductions like charitable contributions, many people just take the standard deductible. However, there is a more optimized way to make your charitable contributions.

You have the option to open a donor-advised fund. Within the donor-advised fund, you can make two to four years of charitable contributions in a single tax year. With these contributions, you may be able to pull yourself over the threshold of the standard deductible in favor of itemizing your tax deductions.

Set up a donor-advised fund, move some assets into the donor-advised fund this year. And then have the donor-advised fund for the next two, three, four years write a check to your church every week or every month. What that does is it takes two, three, four years worth of donations to your church and moves them onto this year’s tax return.

If you were going to make these contributions anyways, then this is a very tax efficient strategy. However, it is only worth pursuing this strategy if you are relatively close to the standard deduction based on your other deductions for the year.

Another way to donate to your charity of choice efficiently is by donating stocks or securities directly to the charity or to your donor-advised fund. With this donation, you will be able to claim a tax deduction for the fair market value of those shares and you will avoid paying the capital gains tax.

If you want to learn more about the specifics behind tax deductions and the benefits of itemization check out Sean’s post here.

How To Connect

If you want to connect with Sean, then check out his blog, FI Tax Guy, or his firm’s website Mullaney Financial And Tax. You can also follow him on Twitter @seanmoneyandtax

The Hot Seat

Favorite blog: J.L. Collins Stock Series

Favorite article:  Cosmo Kramer and Financial Independence

Favorite life hack: Fasting every other Friday by skipping breakfast and lunch. It offers spiritual, health, and financial benefits.

Biggest financial mistake: Chasing yields.

The advice you would give your younger self: Stay close to the Catholic Church. It is so much more than just going to church on Sunday, prioritize your faith and your God.

Bonus! What purchase have you made over the past 12 months that has brought the most value to your life? HP laserjet printer and scanner

Related Episodes And Articles

New to FI? Be sure to check out Episode 100: Welcome To The FI Community!

How To Fund Your Child's Roth IRA And Other Tax Optimizations With The FI Tax Guy

ChooseFI has partnered with CardRatings for our coverage of credit card products. ChooseFI and CardRatings may receive a commission from card issuers.
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