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 Make Your Kid a Millionaire
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.
Doug Nordman and Carol Pittner show you how to validate your childs feelings about money, talk through mistakes, and think of better ways to manage their money the next time.
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!
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.