How do you invest for your children?

Question

1. What is your method of investing/saving for your children?

2. At what age can I open a Roth IRA and pay my kids an income? My financial advisor says we need to wait until they are 6 yo to not get audited. Every source I read and watch says to start when they are born. They are young now, so we would pay them for modeling for marketing pictures for my wife’s business as a realtor. When they are old enough I will pay them to help with work on our rental properties. Appreciate the feedback!

Jeff Nash · Answer

@Dominick Johnson the comments above are all great possible options depending on the situation.  529 for education, UTMA/UGMA (but you’ll give up control eventually), Roth IRA if you can justify and substantiate the activities and tasks they perform (can’t just issue a 1099 as it is assumed you have control over their activities and supervise).  There are a few court cases over age and in the mid to high digits is supported (depending on tasks and work performed). If it was really important to you you could probably even do an NIL situation for website and advertising/marketing, but an actual contract or agreement with some analysis of pay would have to be done which would come with planning and upfront cost.

Another thing is cash value life insurance, preferably with a mutual company.  We’ve used that for our son and did it immediately when he was only a few months old.  We designed it a certain way so plain vanilla is not necessarily the best.  There are other reasons for doing this outside of investing such as guaranteeing his insurability, as life insurance is primarily for protection first. It is not something we are looking to get some knock out return on but just a way to set him up (and presumably heirs) for the future.

We also do have him set up with an UTMA for a small amount.  We use it for educational purposes and talk with him about it frequently to the point that he asks how his account is doing and wants to know why, and also see if he is beating his older cousin!

Daniel Murphy · Answer

While I have never read the IRS info regarding age, I've always been under the assumption that if you document properly, you can pay your kids.  Modeling etc. could qualify, I would just make sure to document everything to protect yourself.

As far as how to save / invest.  I have 4 kids.  5, 15, 17 & 19.  I decided on a UGMA (uniform gifts to minors) account.  I decided on this because it's flexible.  We save in their account and have control over it.  Until they become the age of majority which you can typically elect to be either 18 or 21.  A key thing to understand is, at the age of majority you can no longer make any changes to the account. Only your child can.

Also, at the age of majority the accounts becomes property of the child, so they could go blow it all on a car or something stupid.  The real key is...

The child needs to know where the money is, and sign paperwork to change ownership.  So in my case, I have the accounts invested very aggressive while the kids are young.  As they get closer to the age of majority, I'll move it more diversified & conservative.  If it sits invested for a few years because my kids don't now where the money is held, it can stay invested as is for as long as you want.

I hope that makes sense... Message me if you have any further questions.

Henry Clark · Answer

1.  Term life insurance.  View your spouse as a single parent.  Your kids lifestyle and future plans without you.  You might want a policy of 25 years.  This will het them through adolescence, college, maybe a wedding.  Car for high school.

Amount.  You want all of your debt paid off, PLUS.  Cover your REI exposure.  Example if you were in the process of building a house and had $150,000 sunk into it and debt of $125,000 they will not get $125,000 for a half built house.  So cover your exposure.

2.  529 plan

3.  Use the lookup on my name.  Look for a post.  What happens if you die.  For example. You die. Go into probate.  Your Joint personal and business accounts are frozen. You have cash but your spouse can’t access.  Set them up as TOD. 4.  Are you doing business as an LLC?  If not your family assets are exposed

5.  Personal guarantees.  Your family assets are exposed.

Basically review how you are doing business to protect your family assets.

Then work on their investing.  As mentioned advertising.  How do you get them a car as a business expense?  How do you pay for their college as a business expense.  Etc.

Ricky A. · Answer

@Dominick Johnson, we started paying our kids for a marketing engagement which allowed them to max out Roth IRAs in 2019 when they were ages 5 and 2.  We would have started earlier if our CPA had mentioned the strategy earlier.

In late 2020, we (and the company) got SSA notices for the kids asking to verify the reported pay info.  The notices seemed to be directed toward the younger kids.  For example, my business partner only received a notice for his youngest kid who is a year older than my oldest, and he didn't get notices for his two older kids.  My CPA said this was the first time he knew of that his clients received such notices, but they seemed solely meant to verify that the earnings were being reported on the correct SSN like to prevent SSN theft.  Once we (and the company) verified the info was being reported on the correct SSN, the earnings were credited to their SSA accounts.

Dominick Johnson · Answer

Thanks for sharing your experience. That is helpful to know you didn’t have any issues with their age.

How do you invest for your children?

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