Broker Check

Roth for Kids

May 07, 2024

How Small Business Owners Can Support Their Kids with a Roth IRA

As a small business owner, you’ve relied on your business to take care of your family in good times and bad. But did you know that it’s not just your company’s profits that can help support your family? You can actually utilize your business to set up a Roth IRA for your children.

Let’s learn about how a Roth IRA can provide your kids with future growth potential, and how you can use your small business to help.

Why a Roth?

With a Roth IRA, your children will get access to a tax-advantaged retirement account that allows their retirement savings to grow tax-free. While contributions to a Roth IRA are taxed, any gains in the account are not taxed upon withdrawal in retirement.

What are the restrictions?

Not everyone can contribute to a Roth IRA. There are income restrictions that preclude your kids from making contributions if their income is above the Modified Adjusted Gross Income (MAGI) limit for that year. Contributions are also limited yearly, and you should check the limits for the current year before making contributions.

Lastly, if your child is underage, you may have to open a custodial account for them where you control on behalf of your child. Check with your state laws to determine whether your child can open a Roth IRA account on their own, or if you’ll need to open a custodial account for them.

Using your business to open a Roth IRA for your children

Because everyone who contributes to a Roth IRA needs earned income, you can use your business to make them an employee. This will allow you to compensate them for any work they’ve done, even if it’s just a small amount. Any money they earn can then be contributed to Their Roth account.

It’s likely that your kids won’t be receiving much income, and as a result, will be in a low tax bracket. Therefore, their Roth contributions would be taxed at this low bracket, allowing them to contribute even more to their retirement savings.

Once contributions are made to the Roth account, you’ll then have to decide how that money will be invested. Most Roth IRAs allow you to invest in stocks, bonds, ETFs, mutual funds, or a variety of other investment options. If you feel overwhelmed, you can always discuss your investment options with a financial advisor.

Withdrawals before retirement

It’s true that a Roth IRA is a retirement account, but there are some instances where the money from a Roth can be withdrawn early without incurring a penalty. Your kids could use their money from a Roth IRA to:

  • Pay for education expenses
  • Purchase their first home
  • Pay for medical bills

These uses help provide more financial flexibility for your kids down the road, and can help them pay for certain expenses before retirement.

Utilizing your small business for financial gain

As a small business owner, saving for your child in a Roth IRA is just one benefit you have of owning your business. There are many other tax, savings, and financial benefits that you can also utilize for yourself, and your family. A financial planner can help you learn more about small business financial strategies and which might be best for you.