136R | Silver Spoon or Skills

136R | Silver Spoon Or Skills

Here's a case study on funding a child's Roth IRA and listen to feedback from the community.

Solar Panels Are Installed

It's official! The solar panels are installed on Brad's roof and they are producing power. He is using the SolarEdge app to track their production over time.

Trading In Gas For Battery-Powered Lawnmower

Since the move to a smaller lot, Jonathan decided that he no longer needed the riding lawnmower. With the money he earned from the sale, he decided to buy a battery-powered mower instead of a gas-powered mower.

Already, he has discovered the convenience of not having to worry about oil, gas, or other maintenance that accompanies a gas-powered mower.

At some point in the future, it could be worth it to take convenience a step further and buy a “Roomba-style” lawnmower. Basically, it could allow you to buy the convenience of never needing to mow your lawn again. Although this is just an extreme example, it underlines the importance of being open to the idea of improving your life based on your values.

FI is not about being miserly, it is not about watching every penny and eating beans and rice. It's about what do you value in life.

Roth IRA Benefits For Your Child

After Sean's deep dive into funding a child's Roth IRA, it is clear that this strategy could have amazing impacts.

My biggest takeaway was the extra benefits that are added when the parent has a side hustle sole prop, LLC, not an S-Corp. The extra benefits when a parent has a side hustle in which they are able to employ their child.

Of course, it needs to be approached in a legitimate way with proper documentation. But the potential benefits of this strategy could alter the trajectory of your child's future in a positive way.

By showing them how to work hard and optimize their life, they are effectively building behavior that will ensure that they never need this money. They would learn many valuable lessons like:

  • Realizing that your side hustle provides an income which makes you less reliant on a sole employer.
  • Entrepreneurship by building a side hustle.
  • Talent stacking.
  • Building a work ethic by building something yourself.
  • Spending time with you and making valuable memories.

I think the idea that you can take something that you are working on, help your kid out. Both develop an income stream, build this skill set, learn entrepreneurship, and get a chance to spend time with their parents, build that relationship, is incredibly valuable.

Related: How To Hire Your Children And Reap The Tax Benefits

Roth IRA Case Study

In this example, a couple is earning $85,000 through their day jobs and $25,000 through a side hustle. In total, they earn $110,000 a year and we assume the standard tax-deductible of $24,400.

How would paying their child $3,000 a year impact their finances?

After the standard deductible, their taxable income is $86,000. In 2019, if you are filing married jointly and your taxable income is over $78,950 then you are in the 22% marginal federal tax bracket. Therefore, the dollars over $78,950 are charged at a rate of 22%. Basically, the $7,050 are taxed at 22%.

By employing their child and paying their child the $3,000, that effectively for them is going to reduce their taxation on that last $3,000 by 22%.

If the parents could employ their child legitimately through the sole proprietorship or LLC, then they could also avoid the payroll tax of 15.3%. So, the family would save $660 plus the payroll tax.

Now, if that child earns $3,000 a year from age 8 to 18 it would total $30,000. If they put the total of that earned income into the Roth IRA and invested in low-cost mutual funds with annual returns of 8% then by 18 years old the account balance would be $46,936. By age 28, the account would grow to $101,000. By 60, that original investment would be worth $1.2 million!

Plus, they do not have to leave the money in this Roth until 59.5. The contributions are available for withdrawal at any time.

This could be an amazing opportunity to set up second-generation FI!

Listen to the full episode with the FI Tax Guy here.

Community Feedback

Let's hear what some of our members have been up to.

Voicemail from Chris

“Hi Brad and Jonathan. I’ve called in once before when I paid off $100,000 in my loans when I was in medical school and I decided to try and take charge in that way and reconsolidate. I wanted to reach out now because my wife wanted me to call in to leave a voicemail saying thank you. Recently you convinced us that we should check our insurance policies and now we are going to be saving about $300 every six months in GEICO.

I wanted to say thank you because when I was in a dark place with about, you know $400,000 of student loans and couldn't really find the air to breathe or look forward and had to look for the things that I could control, this sort of helped me change my perspective and feel like I had a modicum of control in my life when I felt like, in all intents and purposes, I was owned by the medical system. And you know, this really helped me find a lot of hope and perspective in my life. Not only in change financially but also personally.

You guys inspired me to understand my value and last week I talked to my employer and while they tried to brush me off initially when I discussed finances, I pressed them that their fringe benefits were simply not competitive. They immediately went up the chain and came back to me with a more competitive offer which may still not be at the top of what I can earn but it something. And they never would have considered that if I hadn’t spoken to them. And you guys gave me the confidence and motivation to do that. So I just wanted to say thank you. I don’t think I could say thank you enough ways. “

Great job Chris! You took the initiative and got off the couch. Anyone can listen to ideas on how to change your life but you took action and made it happen!

Robert Announced Early Retirement

After 17 years at a company, Robert left the office forever. It shows that by making optimized choices over the course of several years, you can make this happen.

You can reach that point where you do not need to work before you are 40 years old. And you get the next five-plus decades of your life to do with what you want.

Share Your Story

Do you have a story that needs to be shared? This community is entirely dedicated to people making optimized choices that impact their life in a positive way. Everyone has a different story, but learning from others is a great place to get started.

You can leave a voicemail to be shared on the show here.

Or you can submit your story here. You may have the opportunity to share your story with the community on the show!

ChooseFI T-shirts

By popular demand, Brad and Jonathan have found a way to distribute t-shirts. In a similar way to the Tugg ticket platform, the t-shirt maker will send out shirts to a local group when a minimum threshold is hit.

Of course, these t-shirts are not being sold for profit. It can be a fun way to get involved in your local community. Find out more from your local group. If you need to find a local group, then start your search here.

Playing with FIRE

The Richmond screening is tonight! If you are still looking for tickets, then buy yours here.  This evening of FIRE is the largest FI event yet with over 500 people coming out.

If you want to find a show in your area, then check out Tugg for tickets and dates.

Related Episodes:

Your Financial Resilience Toolkit

Affiliate Disclaimer

ChooseFI seeks to uncover helpful services that help you be financially resilient. However, we may receive compensation, at no cost to you, from the issuers of some products mentioned in this article, including from CardRatings for our coverage of credit card products. Opinions are the author’s alone, and this content has not been provided by, reviewed, approved or endorsed by any of these entities. See our disclosures for more info.

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5 thoughts on “136R | Silver Spoon Or Skills”

  1. Another great podcast! I actually came up with $1,037.27 in tax savings using your scenario of paying a child $3000 for working in your business. You probably don’t want to see the entire calculation (well, maybe Brad does…), but when you consider that the additional $3000 of business expenses reduces the parent’s self-employment tax, the savings are more than the $660 mentioned. Excellent strategy for those who can employ it!

  2. I chose not to buy the robotic mower yet. They are really cool and your lawn always looks perfectly mowed. However it does not edge and depending on your lawn that may be an issue. The one I looked at was $2,800 plus around $500-$700 to install it. You need to run a cable around the perimeter of your mowing area. This was one reason I said no. It seems the cable break and degrade over time. That means it’s a maintenance issue and it’s something that may have to be done every few years. We have lots of critters so I can see this being a much larger issue for us.

    The mowers also need software updates and seem to keep getting stuck or have a motor / blade issues. It seemed like the yearly maintenance cost would be high. They also keep making improvements and I feel that in a couple of years they will be significantly improved and so I want to wait. They may also get to the point where you don’t need the guide wire and are full gps.

    The cost factor of how much do I have to pay someone to mow versus the cost of the mower. In this case, the robot mower wins. Up until now, I have been paying my kids and that allows them to fund their ROTH IRA’s. Unfortunately after 19 years, our tractor broke and it’s not worth the repair costs. I bought it after negotiating with home depot for $850. Well worth the cost.

    While investigating and figuring this all out I started to borrow my neighbors zero turn mower and discovered I could mow the lawn in 24 minutes which is half the time it took with our old tractor. His mower is $3,000 as well. I thought I only need to use this for 24 minutes a week for half the year. That seems absurd to spend all that money so I worked out a deal with my neighbor to borrow his every week. I help him with maintenance on the mower and bought him some blades. Every so often I drop off a bottle of wine and fill up the tank on the mower.

    Seems like a much better FI choice.

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