The Investment Scientist

“Son, I Just Made You a Millionaire!”

Posted on: December 23, 2022

I have a 14-year-old son who has done some odd jobs for my business this year. What he did not know until now is that I actually paid him about $7000 in 2022 and put $6000 of that into a kiddy Roth IRA that I opened for him. 

This is how I told him.  I pulled him aside and announced: “Son, I just made you a millionaire!” That got his attention away from playing video games!  He asked: “How so?”

“Daddy just put $6000 into your Roth IRA. In a few days, when it’s 2023, daddy will put another $6500 into your Roth IRA. This type of account lets your money grow tax-free, and when you retire, lets you withdraw the money tax-free. Let’s say you have a very productive life and retire at 74. If you don’t touch the money until then, how much money will you have assuming the money grows at 8%?”

Being the smart boy that he is, my son quickly figured out he should use the compounding formula: 8% per year, compounding over (74-14) = 60 years will make the money 1.08^60 = 101 times over. Since he gets $6000+$6500 = $13,500 from daddy (actually by his own work.) $13,500*101 = $1,363,500! He broke out in a smile! 

I smiled as well since I taught him a lesson about investing: start early, stay disciplined and let compounding work its magic. 

A few notes for parents who want to do the same for their children. 

  • Minors can only put money into a kiddy (Roth) IRA account if it is from their earned income. That is income from work. That’s why if you have your own business,  it is much easier to pull it off.
  • 14 years old is the youngest age at which I would pay my kids to work. Though some CPAs and attorneys say you can go younger than that, I don’t want to run into trouble with child labor laws. 
  • Minors don’t have to file their own income tax returns if their income is less than the standard deduction, which for 2022 is $12,950. 
  • Unless your business is a sole proprietorship,  a partnership or a LLC filing tax as a partnership, your kids must pay payroll taxes. That’s why I paid my son $7000: after paying payroll taxes, he will have more than $6000 to put into his Roth IRA.
  • The IRA contribution limit for 2022 is $6000. In 2023, it will increase to $6500.
  • Do your own research.  There is an abundance of information regarding paying minors and leveraging kiddy Roth IRAs on the internet. Better yet, consult your CPA if you have one. 

Schedule a 2nd opinion financial review, buy my wealth mgmt books on Amazon.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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