NATALI MORRIS

Natali Morris Blog

October 18, 2015

How To Give Your Children Age-Appropriate Work So That They Qualify For An IRA

I once heard a guy on a podcast say that he pays his children a salary to use their likeness in his marketing materials. Basically he pays them as if they were models and they do nothing in exchange. Their salary qualifies as income so that they can have IRAs. I’m not for that. I don’t think that this sends a good message.

I’ve also read about a family whose 12 year-old does all the accounting and book keeping for their small business. I am for that but Wow! How do you groom a 12 year-old to do this when most adults cannot!?!?

Both of my children have self-directed IRAs for work they do for our family’s real estate investing LLC. In order to have an IRA, one must have income. There is no age requirement. You could pay your newborn a “modeling” salary if you wanted to but teenagers? What does it teach a teenager to collect a paycheck for absolutely no work whatsoever? The guy on the podcast said that he couldn’t get his teenagers to do work so he came up with this hack. I’ve not parented teenagers but I’ve been one and I would never have got away with laziness in my house and collected a paycheck. I can just hear my mother and father belly laughing at the very notion.

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Children at work. Bedhead optional.

Each family must decide on their own how to employ their children if a retirement account is a family goal but I do think that small regular work is a healthy precedent to set for children.

My children are 3 and 5 years old and they do administrative work once a week. That means that they put stamps on envelopes, scan receipts on our Neat Connect, and shred receipts and documents in my shredder (with supervision!).

Hippy sidenote: Receipts contain BPA so I make sure that they wash their hands thoroughly after work!

Each week, while I am doing regular bookkeeping and mail filing, I set aside a pile for the kids to “process.” It takes them about half an hour and they make $25 per month, plus a $1 bonus in their spend jars. This works out to a little over $5 per processing session. I think this is more than fair. Plus, no one would call this embezzlement. This is legitimately their money that they earned.

Of course, at $25 per month, they are not going to make the maximum contribution amount for an IRA, which is $5,500 per year. We will likely give them a bonus at the end of the year but even with that, they’re not going to even get close. Doesn’t matter. What does matter is that they legitimately work for this money and get in the habit of contributing to a retirement plan.

One reader asked if I had to adhere to minimum wage laws for children. This does not apply because we pay them as independent contractors not hourly employees. We don’t deduct taxes from their pay. We give them a 1099 at the end of the year and they report it on individual tax returns.

So how can you find age-appropriate work for your children? I’ve come up with some ideas by age that might help:

Another reader provided this caveat on my previous post about children’s IRAs: once the child comes of age, they can cash out the IRA and take the tax hit for quick cash. This scares me! I’m not doing all of this for my children to take the out as young adults. Oh hell nah! I’ll have to make sure I nail the lesson into their heads while they’re in my home for the next decade and a half. Or else come up with some very solid threats to use into adulthood. I’m not above threats.

Remember, you do not have to be incorporated to pay your children for work, although I think everyone should at least consider incorporation in their household. Your children could have their own babysitting company and you could employ them as contractors. They can do snow shoveling, lawn mowing, whatever. The point is that it is their job independent of their chores. Do not pay them for chores. The important thing is that you 1099 them at the end of the year for real work. You can do that from your LLC or as an individual tax payer, just like you are supposed to do for your babysitter, housecleaner, construction contractor, etc.

What jobs do your children do in your house that could qualify as income?

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6 responses to “How To Give Your Children Age-Appropriate Work So That They Qualify For An IRA”

  1. Dave K says:

    Natali,

    Always a pleasure to hear what you’re up to. Very inspiring! I’ve got three kids who could be better employed in my household — so I’m going to adopt some of your tips.

    BTW: president –> precedent?

  2. This is such great information. Some of which I was aware of but the idea of a family "company" never occurred to me.

    Nattily your blog is one of my favorite parts of my reading list now and I appreciate you sharing your knowledge and experience. You’re amazing.

  3. TaxDaddy says:

    When our teens got a "real" job, such as delivery driver or convenience store clerk, we matched their income 100% (as gift transfers) to fund their self-directed Roth IRAs (invested 100% in Vanguard total stock market index fund). Of course, the over 18 caveat applied: our son cashed in his IRA when in college, our daughter still has hers and has added to it every year. (Our son is now older and wiser and has fully funded an IRA and 401k from his 6-figure salary. Our daughter is married and is the CHO of her 2-income family.)

    • Natali Morris says:

      Holy cow awesome idea!! I never thought of matching! Did you have to 1099 them for your contribution?

      Thanks for your comment!

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