Roth IRAs for Kids

Small businesses play a significant role in labor markets.  They employ 61.7 million Americans; 46.4 percent of all private-sector employees.  In the past 29 years, small businesses have been responsible for generating 17.3 million net new jobs, which accounts for an impressive 62.7 percent of all jobs created since 1995. (1)

Knowing the impact small businesses have on society and the economy, it is easy to see why supporting small businesses is important.  #ShopSmall is certainly one way of doing that!  Another is for small business owners to ensure the internal structure of the business makes sense, so they are supported from the inside, out.

For example – Some small business owners may find it challenging to provide additional benefits to their children who work for their company.  One often overlooked option is including a Roth individual retirement account (IRA) as part of their compensation.  This strategy can often benefit both the children and the business.

The Basics of a Roth IRA
A Roth IRA is a tax-advantaged investment account that allows individuals to contribute after-tax income.  Unlike traditional IRAs, contributions to a Roth IRA are not tax deductible, as their advantage lies in the tax-free growth potential, and tax-free withdrawals in retirement.

Roth IRA contributions are phased out for taxpayers with adjusted gross incomes (AGIs) above a certain amount.  To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.  Tax-free and penalty-free withdrawals can also be taken under certain other circumstances, such as the owner’s death.  The original Roth IRA owner is not required to take minimum annual withdrawals.

Utilizing a Roth IRA for Compensation
To contribute to a Roth IRA, the working family member must have earned income.  This requirement creates a unique opportunity for small business owners to include their children as employees and compensate them accordingly.  In this scenario, the fact that the child is likely in a very low tax bracket is an advantage, meaning that a smaller percentage is paid up front.

Building a Foundation for the Future
Not everyone knows that Roth IRA funds can be used for various purposes before the age of 59½, such as purchasing a first home, covering educational expenses, and even paying medical costs.  Consistent contributions from a young age can accumulate into a substantial account.  Imagine that your child starts working for your business at 16, continues doing so through college, and all the while, your small business contributes to their Roth IRA.  Upon graduation, the child could have a sizable sum saved for milestones such as purchasing a first house or funding graduate level education.

Seeding Financial Success
Although the initial contributions may seem small, the long-term benefits of including a Roth IRA in a child’s compensation package are significant.  It not only establishes a solid financial foundation but also instills valuable lessons about saving, investing, and preparing for the future.  By involving a financial professional, parents can ensure that their children receive qualified guidance as they transition into adulthood.

Preparing for the Next Generation
Managing money for the next generation has gained considerable attention in recent years.  As businesses and families prepare their financial legacies, strategies such as including a Roth IRA in compensation packages are becoming increasingly popular.  By working with a financial professional, families can navigate the complexities of wealth management. If you own a small business, including a Roth IRA in your children’s compensation package could be a game-changer. With the potential for tax-free growth and a range of permitted uses, this strategy can provide numerous benefits and potentially greater financial success.

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This blog is intended for general informational purposes, and should not be taken as strategy or advice by ATLAS Lifestyle Planning Group (ATLAS LPG).  ATLAS LPG encourages all individuals to consult their financial professional about these or other matters which concern their personal finances or financial strategy.  If you do not have a financial advisor, or feel you may benefit from seeking the advice of a different financial advisor, please do not hesitate to reach out directly to your ATLAS office, or contact us HERE.  Your ATLAS LPG Team is always ready and happy to help, whatever your needs may be!

 Investment advisory services offered through ATLAS Lifestyle Planning Group (ATLAS LPG), a Registered Investment Advisor.  ATLAS LPG will only provide investment advisory services in jurisdictions where it is registered as an investment adviser or exempt from registration.  Insurance and annuities offered through ATLAS Risk Management Group (ATLAS RMG) CA License # 0M41231.  ATLAS LPG and ATLAS RMG are separate entities and neither provides legal or tax advice.

Citations:
(1)  Advocacy.sba.gov, March 7, 2023

* Some of the information found in this article may have been provided by FMG or Assetmark Inc.