Unless you're new around here you probably know we are always looking for ways to build legacy wealth for our family, as well as legally reduce our overall tax burden. Since we’ve had children, we discovered another investing strategy that builds an incredible amount of tax-free dollars!
Our children have self-directed Roth IRAs. Our daughter, Ava, has had her account since the age of three. Per the IRS rules, there is not a minimum age to open an IRA. However, the person must have earned income.
You might be scratching your head—how can a three year old have earned income? It’s possible! You see children in ads every single day who are paid for modeling gigs. Since our real estate business is a business (read: LLC), we are able to give our children jobs, and pay them accordingly.
They work for our business by doing small administrative tasks. For example, every Saturday, it is their duty to shed documents, put stamps on envelopes, and deliver outgoing mail to the post office. This is legitimate work; their money, which is being deposited into their IRAs, is indeed earned.
Because their IRAs are self-directed, there is a list of things those funds can be invested in, one of which is real estate. And although their IRAs have a limit of $5500 per year, which is typically not enough to purchase a property, there are some ways to bypass this issue. For example, our son and daughter could combine their funds, and purchase a property together in a few years. Our children could partner with someone else, or lend private notes on a property.
Not only are our children receiving high returns on their investments, but also their accounts are pre-taxed! This means we’re paying taxes on the dollars before they are put into the IRAs, but at retirement age, the money will be tax-free! The potential for growing these accounts is incredible.