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Investing For Kids

Looking for Money to Fund Your Child's DRIP? Pay Your Kids!


If you have your own business—even a sideline business—or a professional practice, you should consider hiring your children or grandchildren. You’ll get to deduct the money you pay them while the youngster can earn as much as $5,700 (in 2014) without owing any income tax.

This strategy works particularly well if your business is unincorporated and your children are under 18. In those circumstances, you won't owe Social Security or Medicare tax on the money you pay the youngsters.

Use this strategy but don’t abuse it. Pay a fair wage for the work that’s actually done. Very young children can run errands, do paperwork, and handle other simple chores. We’ve heard of two year olds that were paid for modeling. Make sure that you keep records to sustain your write offs. Then encourage your child to contribute these funds to a Roth IRA.

The power of tax-free compounding will provide outstanding results. Let’s assume that $2,500 is contributed to a Roth IRA on the child’s fifth birthday and that another $2,500 is contributed on his or her sixth birthday. That $5,000 investment would grow to almost $1.6 million by the time the child is 65 years of age—based on an average annual return of 10%.

The effect of starting early is clear if you compare those results with the results achieved by a college graduate who begins annual contributions of $2,500 to a Roth IRA on his or her 24th birthday. Even after investing a total of $105,000 by the time that person reaches the age of 65, the account would have only grown to about $1.48 million. In other words, the $5,000 investment produced $120,000 more than the $105,000 investment

Here’s an even better illustration of the “miracle of compounding.” If you continued to set aside $2,500 on each birthday—beginning at age five and ending on the child’s 18th birthday—the child would have a kitty of almost $77,000 at the end of his or her freshman year in college (after total contributions of $35,000). But if you were able to “let it ride” and earn 10% annually until the age of 65, that $77,000 would be worth almost $6.8 million!

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