Natali Morris Blog

September 29, 2015

Why My 3 Year-Old Has a Roth IRA And Why Yours Should Too

Correction: Why my my 3 year-old AND my 5 year-old BOTH have Roth IRAs. And not just any old Roth IRA. They both have self-directed Roth IRAs!

529 college savings plan theme with white piggy bank with Eyeglasses on pink wooden wall

This is slightly advanced investing advice but if you stick with me, I’m going to convince you that your children can build astronomical tax-free savings! We’re talking real generational wealth here!

I was AMAZED when I learned this investment tool and even more amazed that I had not heard of it before. So listen up! Here is how it works:

Anyone can have an IRA as long as they have income. My children are paid small (emphasis on small) monthly paychecks out of our family’s LLC. They will report this income in taxes at the end of the year. This is a win/win for us for a few reasons:

  1. That $25/month we pay each of them is $25 less that we do not pay taxes on at our higher tax rate. Our family is taxed on that $25 at their toddler-size tax rate. Score!
  2. Since their IRAs are Roths, they will pay the taxes on them in the years that they contribute and then NEVER again. They will not be taxed on their withdrawal of what they invested nor on the money they earn on their investments. (Learn the difference between a Roth and a Traditional here.)

Note: You don’t have to have an LLC to pay your children. You can pay them out of pocket and 1099 them at the end of the year the way you do your babysitter, contractor, etc. Although in this post I try to convince you that you should incorporate in your family.

Allow me to emphasize the word “earn.” We do not just give it to them with a wink to the government. We give them jobs appropriate for a 3 and a 5 year-old. Most often it is putting stamps on promotional mailers or shredding documents. But they do in fact earn this money and they are aware that they are doing a job. They of course do not understand that they are investing it in tax-free environments. They don’t even know what taxes are yet. But they do jobs for pay beyond their normal household chores.

And let me take this opportunity to assert that I DO NOT believe in paying children to do chores! I’m with Ron Lieber on this one. My kids do chores because we are a team and our household is a joint responsibility. I don’t get paid to keep our things nice and they shouldn’t either. They get paid for “work” just like I do.

Most investment houses give you a set number of investment options inside an IRA and a 401(k). Most of them are limited to stock market investments: stocks, bonds, mutual funds, ETFs. However, the government allows you to invest your IRA money into pretty much anything that does not directly benefit you in this moment. You are allowed to invest in real estate, private mortgages, private company stock, precious metals, start-ups, intellectual property, even horses! It is all allowed! The growth of those investments is all tax-free if your investment vehicle is a Roth!

Now everyone knows that rental real estate is an awesome investment. So if my children build up enough wealth to purchase rental real estate, which they eventually will – especially if their employer gives them holiday bonuses! – then they can rent out these properties and the rent they earn on those investments grows completely tax free. FOR-E-VER!

We make it our business to find wholesale real estate investments, which means off-market discount properties. Not everyone has the time and know-how for that but there are PLENTY of people willing to help you find discounted off-market properties. There is are a slew of podcasts aimed at helping you do just that and it is totally on the up and up! (If this is something you’d like to learn about, write me. I can point you in that direction.)

Think of the possibility! In my personal self-directed Roth, I purchased a $10,000 home in the suburbs of Philadelphia and I rent it out for $800/month. That is a cap rate of 57%, which is kind of unheard of! The stock market CANNOT do that for me, no way, no how! That $800/month is a tax-free return. Forever!

The investment firms you know from the commercials can’t really help you with this. You need an IRA custodian that allows you to self-direct. We use Equity Trust Company. I have no financial relationship with them other than being a client.

For my husband and I, these accounts are a little costly. The yearly maintenance fee is around $300 and there are additional fees for most transactions such as bill pay or money wiring. But I appreciate that all fees are easy to see. There are no hidden fees and no fund expense ratios.

HOWEVER, for the kids, there are no annual fees until they are 18. There was a one-time set-up fee for $245.

These accounts were simple to open up for the kids and as easy as rolling over our existing IRAs for my husband and me. They are more labor-intensive to manage however. For example, I cannot buy so much as a lightbulb for these properties out of my own money. Every cent that goes into these investments has to come out of the IRA. The IRS will not allow you to co-mingle your money with your tax-free money. So if I get a tax or an insurance bill, I have to authorize Equity Trust to pay it. It is a simple online process but one extra step. If I want that money wired, it costs a fee. If I want a check in the mail, no fee.

Equity Trust is not the only game in town for self-directed investments. Here is a list of others. I’ve had a pretty good experience with them however. I also take the opportunity to pay for the account fees out of pocket because I get the tax deduction this year and leave more money to grow in my tax-free account.

It should go without saying but I’ll drive the point home. You know the equation:

Time + Interest = MUCHO MONEY!

Why not 3!? Why not 5!? Truth be told, I did this when my kids were  2 and 4. Consider doing it now! No time to lose!

The potential for this kind of investing is really mind blowing. My children will not only have a huge retirement account when it reaches maturity, they will also be able to pass it on to their children tax-free because of the nature of this account.

I could talk a blue streak about this investment strategy! But I can also refer you to someone who can do even better. Listen to this podcast and you’ll see why I got started with self-directed Roth IRAs for myself and my family members.

As always, if you’d like email updates about these types of posts, click below. And if you have questions, comments, concerns, I’m all eyes!!

natali pic

61 responses to “Why My 3 Year-Old Has a Roth IRA And Why Yours Should Too”

  1. Vernon L. Vincent says:

    So – for those of us who aren’t incorporated as LLCs, what’s our option. Not to be snarky here, but this seems like a bit much to form an LLC for the purpose of giving my children a Roth IRA.

  2. Jeff says:

    Awesome article and very nice fresh perspective I have yet to hear or read about. Do you and Clayton still claim them each as a dependent on your joint or individual returns? Does paying them an earned income for the sole purpose of investing in a Roth IRA prevent you from collecting the $1000 credit per dependent on your returns?

    • Natali Morris says:

      I believe you still get the dependent credit since they are not self sufficient by any means. They just have small income-earning jobs. I’d have to clarify with a CPA to be sure. Great question!

  3. Lauren says:

    And another question – when do you plan of stopping contributing to each of their IRAs? And do you have 529s for them on top of these IRAs?

    • Natali Morris says:

      I do have 529s for them and I don’t hold them responsible for contributing to those. We contribute to those ourselves.

      It’s not really a question of when I plan to stop contributing to their IRAs as much as it is a question of when they plan to stop working for me. They don’t have a choice but to work for my LLC for now and the pay that they make from me goes into their IRAs so it is them contributing to their own IRAs. But if and when they’d like to get another job, they can contribute to their IRAs from those paychecks. Make sense?

  4. Jonathan says:

    Great post, but why start with a self-directed IRA that costs $245 as an initial setup. At $300 per year in wages, isn’t it simpler/more efficient to just use a low-cost online broker for the first 5 or so years?

  5. Matthew says:

    Ok, my first thought when reading this is how is it legal to pay your children for work? Aren’t there child labor laws that need to be addressed? Those laws may vary by state, but have you done any research regarding the laws? Thanks.

  6. Pat aka "TaxDaddy" says:

    One caveat: When they get older, they are in control! We set up Roth IRAs for our 2 kids when they were young (teens) and helped fund them with gifts to match their earnings. Now they are in their 30s. Our daughter is still going strong with hers and contributing on her own. Our son cashed his in and spent it when he was in college, even though he had a full scholarship. He’s had to start over on his own, now.

  7. Yunea says:

    I have an s-Corp can I hire my children and do this? They are on the way, 1, 2, and 11. I have small things they could do like shred paper. I have been wanting to do something like this for them for a long time, just didn’t know how. I would also really love to start this for my husband a myself as the IRA we have is losing money.

  8. Mary Ross says:

    Wow! This is incredible info! Thanks so much for sharing!

  9. saj says:

    such a timely post. we are expecting a child in may and we were discussing what to do.
    so, you have a 529 and roth-ira for them. do you have anything else?

  10. Keep up the good piece of work, I read few content on this web site and I conceive that your web site is real interesting and holds sets of wonderful information.

  11. Robin says:

    When it is time for your children to go to college does the Roth count as an asset if they apply for financial aid or scholarships?

    • nmorris says:

      Excellent question! I wouldn’t think so but I really don’t know. I’ll have to look into this!

      • The Roth is excluded from the FAFSA but can be included in the CSS that many private institutions are requiring nowadays. JPMorgan has a good piece about college planning.

        Have a great day!


  12. I’ve recently started a website, the information you provide on this web site has helped me tremendously. Thank you for all of your time & work.

  13. […] we employ our children in our LLC. If you have not read my post about paying the children for administrative work through the LLC, which qualifies them for …, please read it! This alone is another reason to consider incorporating in your […]

    • Pamela says:

      This is great information. Looking for some insight. My husband has an LLC. My boys are 10 and 12 so they are ready to spend some money also. If we were to employee them paying them once or twice a month; guide their spending and savings, meaning if paid $50 they would save $30 in a Roth and keep $20 for themselves, it would still be advantageous to the business and to them, right?? I think so. Just need a sounding board.

      • Yes exactly! You can pay them whatever you want actually. My CPA just recommends we keep it under $5,000 per year so that they don’t have to file taxes. And we also have a contract with them in case the IRS would come questioning. It is like an offer letter. “You do this, we will pay you this…” It’s good to have good records for this just so the IRS knows you’re not trying to be slick with them! Which you’re not!

  14. Steve says:

    Thank you for this post, it was really interesting and got me thinking about what I can do for our 3 year old son. I read somewhere else that the maximum allowed Roth IRA contribution is the lesser of annual earnings or $5,500; meaning your child has to earn at least $5,500 to make the maximum roth contribution. I image there are payroll withholdings on the paid wages and possibly resulting income tax filings. hence my questions:

    1. How much are the payroll/income taxes on these earnings?
    2. Do you file a separate tax return for each of your children and get a refund for some of the witholdings?

    Thank you!

    • nmorris says:

      Hi Steve, I believe you are correct. They can’t contribute the maximum if they didn’t make at least that much. So yes, I do file taxes for them in theory. HOWEVER I just tabulated and my children made less than $600. I don’t believe you have to 1099 someone who made less than $600 but I’ll have to confirm that. In theory, if they did, I would 1099 them and they would file tax returns based on those 1099s. They are taxed at the lowest possible income tax bracket because of their age and low salary. This is why this works for our household. They pay little to no taxes on the money we pay them. That money would otherwise be taxed at the HIGHEST tax bracket.

      That help? Thank you for your questions!!

      • Amber says:

        I worked for an accountant for several years and prepared many 1099’s. While you are correct that filing a 1099 is not necessary for pay under $600 for the year, you are skirting the rule a little. 1099’s are to be used for contract work; meaning that the person you paid is NOT an employee and provides a service not only for you, but potentially for many other people. Most commonly 1099’s are used for things like house cleaning service, painters, construction, even farm hands that offer their services to many establishments instead of just working for a single operation. If a person works only for you, does not “hire out” then they are technically an employee and subject to payroll taxes etc. There are different rules for employing family members and certain taxes do not always apply. The IRS has become much more stringent in the last few years because of people trying to get out of reporting income and they especially have cracked down on the abuse of the 1099. I would recommend discussing this plan with a CPA before jumping into a big hairy tax mess.
        That said, I like the creative thinking and will be discussing this option with our accountant. We have put aside $25/mo for both of our children in traditional savings and my husband thinks I’m nuts because I’m constantly looking for a way to increase the non-existent earnings on their accounts. We have planned to teach our children about investing money and like the option of purchasing a rental property down the road but since they are 18 months and 7, that’s still out in the future.

        • nmorris says:

          This is an interesting point. I guess they *could* contract their services to other people. They just happen not to. I just hired Tom Wheelwright’s firm ProVision. They are very much on board with this plan but maybe can teach me to execute it better? I’ll ask them about hiring them as employees instead of contractors. Might be worth a change. Thanks for pointing this out Amber!

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  17. James says:

    So I have two daughters, nearing the ages of 2 and 3. They are both very active and mature for their ages and are very capable of helping out in many ways. I’d really like to open a Roth for them but worried about the IRS determining that they are just too young or that their earned income does not qualify. I had the idea while cleaning up the yard and picking up sticks, pine cones, etc.. Would it be legitimate earned income if they helped out neighbors and also removed yard waste for small amounts? They would actually have fun collecting, piling and removing the items so I figured it’d be an easy way to put them to work and help build a future. I don’t have a “tax adviser”, so is there a way to go directly to the IRS to double check this would fly (other than reading various publications that do not really go into detail)?. Also, how do you determine a reasonable amount to charge/pay for such a service. I would think $5 for each kid, once per week would be reasonable. Assuming I create receipts and each kid is making $20 a month ($5 on 4 different neighbors’ yards), that should qualify right? Just worried that the IRS will see the age and immediately have concerns. There seems to be very little information on minimum ages and what kind of documentation is required to prove the work was done. Any info/insight would be appreciated.

    • nmorris says:

      Good question! As long as your documentation is good, the IRS only requires “earned income” to have an IRA. If they mow lawns, that is earned income. I know a girl in my town that earned a paycheck on a modeling job. She was featured in a magazine. That counts! Your documentation can vary for the girls’ income but either a time sheet or pay stub or receipt should do just fine. No one is going to argue with $25/month for yard work. If we went much higher, I’m not sure. You’d need much better documentation so if they are doing something more valuable for a neighbor, I would just keep careful records. But it all counts!

  18. Wow this is a great idea! I would have never thought to do this. I don’t have any kids, but I will have to keep this in mind for the future. The compound interest even on small monthly deposits will definitely add up over the course of decades.

  19. Brent says:

    your link in this blog entry is a dead link

    BLOG with bad link: “” to “Incorporate your family” .



    I found correct link by using google’s site search “incorporate” site:

  20. Sunny Burns says:

    Awesome Post, and Awesome Blog – just discovered it this morning, I’ll definitely be back!

    I just had a question on how your legal entity is structured and how you pay your kids. Are your kids actually partners on the LLC or just employees that you give W2 income?

    We also own rental property – I know your not crazy about the idea of paying your kids as models for their likeness – but we 1099-misc’d my 0 year old last year. We held three weekends of open houses, and he was at them for every one. We wanted to try to market it towards young families, who hopefully would stay longer and also be able to become friends with our Son(We are owner occupying). Thats how we started his Vanguard Roth IRA last year(I will look more into the self-directed).

    Anyway this year I am starting a Vlog/Video-Podcast, where my Son is in every episode. I am going to form an Entity before the end of the calendar year, but am unsure whether to just be the sole owner and pay my Son as an employee, or make him co-owner of the LLC and pay him as a partner?

    P.s. Loved the comments about Escaping the Matrix on another post I breezed through, I think its a great analogy to the rat race a lot of us find ourselves in. I have also used the reference on my frontpage and on episode 1 of the Vlog(Not yet aired). Anyway I gotta catch a flight now but am looking forward to returning and exploring what other gems you have on this site.

    • Love this comment! Thank you so much Sunny!!

      As for the LLC, they are not partners yet. They are just regular old contractors. I figured I would add them on as partners when they are old enough to understand it.

  21. Debra Klein says:

    Ok. We were planning to open a ROTH IRA for each of our kids when they started earning their own income, matching them dollar for dollar up to a certain amount each year. But the idea of starting them now is intriguing.

    We do not own a business. My husband works a regular job, and I currently stay at home with the littles (on the way, 2, and almost 4). How would we go about setting this up legally? I just don’t want to risk an audit or some other negative ramifications. Everything has to be above board.

    What kinds of jobs would be considered income earners? My son (almost 4) helps some with yard work and equipment maintenance (helping change the oil on the tractor or maintain the chain saws, etc.). My daughter helps with household tasks that I also pay a housekeeper to do every 2 weeks like folding and putting away sheets, washing windows, etc. I’d love to start them out with $5 an hour (that would go directly to their ROTH IRA for these kinds of tasks, but I want to be legal for sure!

    • Hi Debra, thanks for this! I’m sorry my reply is so late. My CPA advises that we pay our kids less than $6k per year and that we document everything we pay them for. So for instance: if your son has to sweep up or do paperwork or do scanning like my kids do, make sure you mark the hours, the pay. I even have an informal contract with my kids for use of their likeness in our marketing material. It is all above board. You just have to be formal about it so no one thinks you’re skirting the rules. Good luck!

  22. […] Why My 3 Year-Old Has a Roth IRA And Why Yours Should Too […]

  23. […] around the office.   The idea works not just for twenty somethings but even for tweens.  I found this story by Natali Morris who pays her three year old and five year old for doing things like putting stamps on mailers and […]

  24. Rachel says:

    I found your blog quite interesting. Thank you for posting.

  25. Romain says:

    Hi there!
    Thanks for such an interesting post.
    You say that you have your 3 year old work for you and have IRS be ok with that. I also read from this article ( that for children under 7, the IRS won’t really let you…
    Who’s right between you and them and why?

    • Well you are only as “right” as you can stand up for what you have done under an audit. To make sure that we have everything done down the straight and narrow, we have employment contracts and pay the kids now through QuickBooks so their earnings are taxed. We have had inquiries from the IRS but we had the proper documentation so they gave us the “as you were” so to speak.

      Thanks for sharing your link Romain!

  26. A says:

    Hey there, just stumbled upon this. I am an EA and would recommend you getting one as well, rather than a CPA not exepreicned in taxes. I am saying this because you ARE required to file taxes if they receive more than $400 in 1099 income, not the $6300 threshold you are constantly stating. Also, you should not be treating them as 1099 contractors, and should be employees as other people have stated. I advise you to hire a competent CPA or EA before posting tax sensitive material like this. Best wishes!

    • Hi there! You’re totally right about not 1099’ing them. That was a lesson I learned this year. I think I should revise this post accordingly because we do take taxes out of their earnings now. We pay them through QuickBooks. Thanks for this!!

  27. Dan Mallory says:

    quick books is expensive if using it just for this purpose how much did you pay

    • Good point! We use QuickBooks for paying other employees and contractors now so it is not an investment for just the kids. But you’re right, that’s too expensive for just allowances.

  28. Dan Mallory says:

    could you suggest a inexpensive I could use to pay toddlers for this purpose and indicate what features are included?

  29. aamercado says:


    Great post here!

    My child is 8yrs old and we are in Calif. Did you need to fill out both Permits?


  30. Marcus A Guzman says:

    My question is, is there still time to open a ROTH IRA for my 4 year old for last year? l do not have an LLC to pay them for work. They will get paid out pocket for doing work around the house. Do i need to apply for an EIN? Please help. Thanks


    • You can contribute to the previous year’s IRA until April 15 of the next year. You do not have to have an LLC to pay them but they have to report income from wherever it is they made it. I would make sure to speak to your accountant to verify this strategy but I maintain it is a great one!

  31. […] for creating an LLC), up to $5,500 of any earned income is eligible for contribution into an IRA annually. Have your children work for your business, and pay their LLC. Just make sure to document all […]

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