Hiring Your Children Could Cut Your Taxes and Make them Future Millionaires

By Heather Taylor2 Comments

If you own your own business, hiring your children or grandchildren could be beneficial on several fronts.
Paying your child cuts down on your taxable income, creating a tax savings for you, but as Vita Nelson points out in Forbes, giving children this early boost could have a significant impact on their future, too.

As long as they have earned income, even children can have a Roth IRA. This retirement account provides the benefit of tax-free distributions if the account rules are followed. All the income the child contributes grows tax-free, potentially resulting in a sizeable nest egg when he or she retires.  

Suppose your daughter earns $5,500 a year working for your business. After 10 years of working for you, her Roth IRA holds $55,000 in total contributions. Now consider what can happen in various investment scenarios:

Using our three models, we figured that the $55,000 total invested in your daughter’s Roth IRA would be worth $74,669 at the end of 10 years at 6%, $82,863 at 8%, or $92,039 at 10%. Keep in mind that the full $55,000 was not invested for the full 10 years. In fact, it was invested, on average, for only half the time. But the compounding is just beginning!

Let’s say that your daughter earns 8% a year inside her Roth IRA, doubling every nine years (using the Rule of 72). Her initial $55,000 ($5,500 invested every year for 10 years) would be worth about $3,831,415 after another 50 years. And if she earned 10% per year, that figure would be $10,749,493. That’s the power of compounding!

Equity Trust clients have shown that building wealth from a young age is a possibility. For example, 16-year-old Brittany is already well on her way to a comfortable retirement because she earns income – then grows it – working for her mother’s real estate business.

In addition to a solid financial footing, helping your child set up a Roth IRA could help them become more financially literate and investment-savvy, which will continue through their adult lives.

Discover if this strategy could help the children in your life. Talk to one of our Senior Account Executives about the options available to your family.