Make Your Child a Tax-Free Millionaire!

Want to jump start your child’s retirement with a million dollar tax-free account? Consider this:

The million dollar idea

As soon as your child begins to earn income, open a Roth IRA and set a contribution goal to reach before they graduate from high school. Assuming an 8% expected rate of return, the investments made by age 19 will grow to FORTY times its value by the time they reach 67 (current full retirement age). For example, $2,500 invested before graduation will be $100,000 at retirement. If you can bump that up to a $25,000 investment before graduation, at retirement it will be worth $1 million!  This idea comes from the Motley Fool Article, Set Your Child Up for a $1 Million Roth IRA in 2022

Why it works

Compounding interest occurs when interest is earned on the interest generated from the initial contribution. The more time the investment has to grow, the more exponential growth will occur. By starting to save prior to graduating from high school, the investment will have almost fifty years of compounding growth.

Even better, while contributions to Roth IRA’s must be after-tax contributions, any earnings are TAX-FREE as long as the rules are followed! Simple to say, but how do you get $25,000 into a child’s Roth IRA? Here are some tips.

Tips to achieve the goal

• Hire your child. Roth IRA contributions are limited to the amount of income your child earns, so earned income is key. If you own a business or even make some money on the side, consider hiring your child to help with cleaning the office, filing or other tasks they can handle.
• Look for acceptable young-age work ideas. Babysitting, yard work, walking pets, shoveling, and lawn work are all good ideas to get your child earning income at a younger age. Cash-based income is harder to prove, so don’t forget to keep track of the income and consider filing a tax return, even if not required.
• Leverage high school years. Ages 15 through 18 will be when your child has their highest earning potential before graduation. Summer jobs, internships and part-time jobs during the school year can produce a consistent income flow to contribute to their Roth IRA and still provide spending money.
• Parent or grandparent matching idea. The income earned by your child doesn’t have to be directly contributed by them to the Roth IRA – it simply sets the contribution limit. Make a deal that for every dollar of income your child saves for college, a parent or grandparent contributes a matching amount to their Roth account. It can be a college and retirement savings in one!

By helping your child get a head start on saving, it should ease any anxiety regarding retirement and help them focus on school, starting their career, and other personal development goals.

Most income you receive is taxable income that is reported to the federal and state tax authorities. However, renting out your home or vacation property on a short-term basis can be done tax-free if you follow the rules.

The rule: If you receive rental income for less than 15 days per year, that income is generally not taxable income.  See here: https://www.irs.gov/taxtopics/tc415

Added benefit: In addition to tax-free rental income, you may still deduct your mortgage interest expense and property taxes as itemized deductions. Neither of these tax benefits is reduced by the income from up to two weeks of rental activity.

Would someone want to rent your property?

Sure it sounds good, but why would someone want to rent your property? Here are some ideas:

Special events. If a big event is in town, consider renting out your home for participants and fans. Common examples include:

• Football games
• Concerts
• Golf tournaments
• Conferences and expos
• State high school tournaments

Vacation home rental. If you have a cabin or cottage, consider renting out your place for two weeks. If you find responsible renters, you may have an opportunity to find reliable repeat renters each year.

Hotel alternatives. Oftentimes travelers from other cities and countries would love to rent out homes or rooms within homes while traveling. This lets travelers have a real local experience.

Know the risks

The hassle factor needs to be considered prior to taking advantage of this tax-free income opportunity. Having a proper rental agreement, damage deposit, and insurance are key factors to consider. Also remember that if you rent out your property for more than 14 days, all rent received is taxable and rental income rules apply. And don’t forget to review any local regulations prior to renting your property.

Home rental sites like Vrbo and Airbnb can help you better understand your options for renting your property.

BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate tax planning, income tax planning, estate planning, and asset protection.

If you liked this, “Your Weekly Tax Tip for February 9 2022”, read our other Tax Tips.  See here: Your Weekly Tax Tips for February 16 2022

Picture this: For the past few years you’ve received your tax return and have had a small but nice refund. Now imagine your surprise, when this year, you are required to send in a fairly big check to settle your tax bill. Believe it or not, this message is almost as hard to deliver to you as it is to hear it. Here are some situations to watch for that can increase your tax liability:

New tax laws. The multiple bills passed to pay out assistance from government programs must now be accounted for on this year’s tax return. While the goal of the legislation is to reduce taxes, there are several changes that could cause you to pay more taxes, including:

• Repayment of duplicate economic stimulus checks.
• New taxability of unemployment benefits.
• Accounting for any small business loan and grant benefits.
• The need to take required minimum distributions once again in 2021.

A child is no longer eligible. This year’s child tax credit is a big increase versus prior years. But if you already received the money through the advance child tax credit payment system, it will impact your refund this year. And as children get older they grow out of lots of things — clothes, interests and tax credits. Here are some age requirements for popular tax benefits:

• Child and Dependent Care Credit: under age 13.  See here: https://www.irs.gov/newsroom/child-and-dependent-care-credit-faqs
• Child Tax Credit: over age 17
• Earned Income Tax Credit: under age 19 (24 if a qualified student)

Earnings with Social Security benefits. If you are recently retired, start collecting Social Security Benefits, and then begin working part-time, you are also in for a tax surprise. These extra earnings could not only make your Social Security benefits taxable, it could result in a reduction of benefits received.

Other life events. Other life events could provide a tax surprise for you. While some may have positive tax consequences, like a new birth, or becoming the head of household, others might surprise you and result in additional tax. Other common life events include retirement, death and entering/leaving school.

Capital gains surprises from mutual funds. Often sales of investments are a planned event. Unfortunately, many mutual funds sell assets and then you receive a capital gain statement with a surprise taxable event.

Want to avoid these surprises? Spend some time now reviewing your anticipated tax situation for 2021. By doing so, perhaps a planned pleasant surprise can be in store for you.

BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate tax planning, income tax planning, estate planning, and asset protection.

If you liked this, “Your Weekly Tax Tip for February 16 2022”, read my other Tax Tips, including: Your Weekly Tax Tips for February 9 2022