A Sure-Fire Way to Turn your Kids into Tax Free Millionaires

This advice applies to US law only.

I’ve discovered a formula that you can use to teach your children about business, selling, marketing, finance, responsibility, and commitment. But you know what’s even better? In the process, they will become millionaires without ever paying a single dollar in taxes! No it isn’t some cockeyed tax protestor scheme. This is absolutely legal and legit.

What is it? It’s a simple formula, and I’ll give to you free.

  1. Start a small home based business. It doesn’t need to be a big deal. It can be as simple as a website or an eBay based business. Any home based business will do as long as it can generate a moderate amount of cash flow. I would shoot for 10-20K of cash flow in the first year at a minimum. It doesn’t need to be profitable; it only needs to generate enough cash flow to pay a very small payroll.
  2. Employ your children. You can start as young as is reasonable. There is nothing illegal about employing your children. There is certainly nothing immoral about it. It will be one of the best educational experiences of their young lives and they’ll learn things they’ll never learn in school.
  3. Create a Roth IRA for each of your children. The payoff will be huge in the long run. I’ll explain later.

Three requirements for employing your children in your home business:

  1. You need a written job description of their duties and it must be reasonable. Examples: Your 8-year-old could help package and ship products. A 12-year-old could help you write blog posts and do site design. Your 16-year-old could help you transport and purchase product. Your 19-year-old could help with bookkeeping.
  2. Keep detailed records of the hours they work. The IRS may ask for them and you may need to prove it was legitimate work.
  3. Pay them a reasonable wage. Paying your 8-year-old $200 an hour for sweeping out the warehouse will get you in trouble, but paying him minimum wage will not. You can pay older children significantly more, but remember the wage you pay them must be a fair market wage.

This formula only works if your child has earned income from your business. It does not apply to unearned income.

· Earned income is money they earn by working for your business.

· Unearned income is money they earn by being part owners of the company.

Make your kids employees not owners.

Now Show Me The Money

You can pay each child up to $4850 per year tax free. If you pay them more, they will be required to declare and pay tax on their income. If you employ three of your children, that’s nearly $15,000 per year completely tax free.

The Big Payoff

We all know how compound interest works, right? The earlier in life you start investing the bigger the payoff. So start as early as you can.

You don’t have to pay taxes on the first $4850 your child earns.

Of the $4850, invest the maximum of $4,000 per year in your child’s Roth IRA so you won’t pay taxes on investment earnings or later withdrawals.

Now, if you employed your child from 8 to 18 years-old, depositing $4,000 annually in her Roth IRA …

Using a Retirement Planning Spreadsheet

Assuming a 10% return (you could easily beat that)…

Without ever saving another dollar after the age of 17…

Without making another investment… ever…

Without paying $1 in taxes…

She will be a millionaire by age 45…
And worth over six million dollars by age 65!

So what are you waiting for? Get out there and start a damn business already!

35 thoughts on “A Sure-Fire Way to Turn your Kids into Tax Free Millionaires”

  1. I just love your posts. This one is especially timely. My 8-year-old and I are starting a Bionicles website together. He is going to find the pictures and tell me what is so cool about these things, and I am going to do the writing and affiliate code. 🙂 My older son got tired of waiting for me and went and made a bunch of money without me.

    Thanks for the mention! I appreciate it. I am still getting traffic from your site from a while back.

  2. That’s a really smart idea. People really need to be more aware of inheritance taxes, the limits of trusts, and the fact that one needs more money for retirement than ever before.

    Furthermore, I can safely tell you that paying 120 grand for college is worth it. I went to a top notch state school and I wouldn’t send my worst enemy there. I know there are amazing schools like the University of California ones, where in-state tuition means you can go to one of the world’s finest schools for not-too-much, but when I see the opportunities my friends who went to Ivies and small schools had versus the ones I had to fight over, it’s not even funny.

    Trust me, you want your kids to have cash and be debt-free. Financial anxieties are some of the worst, especially when this age will go down as one of the wealthiest – if not the wealthiest age – ever.

  3. It’s a very nice write up, and really illustrates those compound benefits. However, 45 years of age seems a pretty long time – but I guess if you place a number of other investment options in there, plus general income, maybe retire at 30? 🙂

  4. This is a wonderful idea. It’s even great during summer wherein your children can work more hours with out the pressure of other tasks like homeworks and projects..

  5. These are all great suggestion. This should prove to those who have no faith to small home business that it’s worth trying, as long as we dedicate our self to it.

  6. I need to have some children first! But I’ll be sure to let my brother know about this. Why don’t parents get taught…Oh nevermind. That is just awesome, thanks for sharing.

  7. There are some problems with this article:

    1) “Assuming a 10% return (you could easily beat that)…”

    This statement is false. If one examines historical returns, there are plenty of periods during which one would NOT have achieved a 10% return – even if invested 100% in stocks. Achieving a 10% return is certainly possible, but beware of anyone who declares that a 10% return is easy to “beat”. Nobody has a clue what the future holds.

    2) A business that generates a $10K-$20K cash flow is a significant undertaking. From a parent’s point of view, I question whether this is the way to go for several reasons:

    –Most parents aren’t saving enough for their own retirements, let alone focusing on their kids’ retirements! This approach would make sense for a parent who already has his/her own retirement covered – but how many parents of 8 year olds have nailed down their own retirements? Not many.

    –Most parents can probably earn far more working at their jobs than messing around with a home-based business (and there’s no way the parent of an 8 year old isn’t going to be hip-deep in the business).

    –Most micro-businesses fail – I know – part of my job involved consulting in that area (now retired). A parent’s time would be far better spent bolstering their own education, or working toward advancement in their career. The writer of the above article glosses over the cold-hard realities of establishing a home-based business.

    –I question the wisdom of creating childhood millionaires. It’s a good way to ruin a kid, IMO.

    Don’t get me wrong… I’m a fan of working, saving, and investing. In fact, I am a millionaire myself, and I retired early. I’m just saying that the above article is rather pollyannish in that it misses some real world realities.

  8. Bob,

    I agree and disagree…

    1. I have never earned less than 10% annually (averaged) and I am not aggressive. I stick with index funds. But that is another post. Over the past 50-75 years the S&P 500 has returned over 10% annually. Is the future certain? no. But all evidence says that an intelligent investor can beat 10%. It isn’t very hard. Remember I am talking about 40-60 year time line.
    2. It may be a significant undertaking, but that’s what i am trying to do with this site. Inspire people to do and be more. You can cite all the failures you wish… but I will cite the successes and learn from them. My wife has started 4 different business that generated over 20K annually without a single failure. She started her current business (which generates over six figures) with $500, working less than 3 hours a day, in a 200 square ft space, while taking care of two children under 5. Tell her it is impossible and that she’d be better off getting a job, you might end up with a shoe in your nuts. I made that mistake once and I won’t make it again.

    In point #2 you point out why people CAN’T do it. I say phooey! YOU CAN DO IT! Is failure a possibility? Yes, but you’ll never succeed doing nothing because you fear failure. The cold hard reality you are preaching is – don’t bother – it’s too hard so don’t even try. If success in a micro business is pollyannish, well… I married pollyanna. People get in trouble because they think they need all this stuff like a formal business plan and a pile of investment capital. But in reality you don’t need much of anything but a good idea to start a business. Most people think it is far more complicated that it really is, so they get themselves in trouble creating some expensive complex business. Keep it simple and cheap.
    You know what does suck? I thought this post would do better. But I think many people think like you. They think it is just too hard and that I am telling fairy tales. I’m not. I need to get off my ass and do some more interviews. I know a family where both the man and the woman were school teachers and they both started microbusinesses. Both quit their jobs and are living their dream. He plays golf all over the world and she design custom clothing.

    Never think of why you can’t do a thing. Always ask how you can do a thing. There is always a way. Is failure a possibility, yes. Accept it and move forward. The only way to eliminate the possibility of failure is by being persistent and learning from your mistakes. But you have to make mistakes to learn from them. Just don’t make the one that kills you.

  9. It’s a wonderful idea. Giving kids their very first experience on business should introduce them to the important points about running a business and how to take care of it..

  10. I agree with this idea. Businessmen can get a lot of training in order to be more competent, but there isn’t enough time for someone to get all the training. As much as possible, it is necessary for young businessmen to train so that they will grow up as a great businessmen..

  11. I love this post! I love the idea, it really fits well with Robert K. “Rich Dad, Poor Dad”. And many others…Please email me Steve! I will be checking back here often!

  12. Excellent post Steve! If people never try, they’ll never experience failure, but may miss out of the opportunity of a lifetime.

  13. Steve, I’m interested in knowing how much you’re worth. Mr. Smith up there brought up some valid points. I don’t think “phooey” is a very intelligent rebuttal. Besides that, assuming he was telling the truth, he’s a millionaire himself. He’s been down the road, so his opinion deserves some degree of respect. And you’re incorrect. The market has not returned at least 10% each year. It has averaged over 10% over long periods, but there have certainly been some years with losses. By saying that an intelligent investor should be able to beat 10%… well, about 80% of professional fund managers don’t beat the market. I wouldn’t guess all of them are unintelligent. Nonetheless, I agree that conservative investments in the stock market to be held for the long term are a good bet.

  14. Jason,

    I’m not going to talk about my net worth.

    My reply was over 500 words one of which was ‘phooey’ in response to his statement that people can’t start a home based micro-business… yes you can… average people do it all the time.

    If you read my comment I said it was 10% averaged over 40-60 years. Put you money in non-managed no-fee index funds for 60 years – you’ll make 10%. Managed funds generally do not perform as well as the market.

    Mr. Smith was quite good at telling us we couldn’t start a business or make 10% over 60 years. I’d be more interested if he told us how he did it.

  15. I like your article, but in my humble opinion, one potential problem with saving money for your kids in that way is that they get control of that money when they turn 18. For a similar reason, when my kids got their driver’s licenses, I did not buy them cars, but instead bought myself a car that they could borrow.

    I think that a less risky approach is to secure your own retirement and teach your kids how to do the same.

    Both of my kids started their own retirement accounts when they turned 18 and both of my kids are well on their way to an early retirement (probably before age 50), but I suspect that might not have been the case had they learned to rely on their parents for income.

    That is not to say that I do not help them at all. I paid for 70% of both of my children’s college education (even though I could have paid all of it).
    I have entirely paid for the education of my grandchildren so far.
    I have entirely paid for all medical expenses for my children and grandchildren.
    I have entirely paid for various non-cashable insurance policies (life and medical)
    I have given them a first-rate education on how to live below their means and how to invest wisely.

    That’s my $0.02 worth (compounded daily for 68 years)

  16. Steve,

    I notice in your response to Jason above that you say you don’t want to talk about your net worth. While I understand that that information is private, I would just like to point out that not saying anything doesn’t help your site at all.

    The first question I ask an adviser (whether real estate, stockbroker, accountant, etc…) is how much do you make doing what you are advising on. I take more notice of advisers who actually do well in their particular area.

    There are many sites out there like this one where you can leach information in the hope of cashing in on a good thing and try and make some money, but someone who actually does it, knows what they are talking about.

    Are you one of the leachers, or one of the players?

    Having said that, I have looked at a few of your posts and liked them. Especially this one since I have benefited from it as the child in the above example. If every adult could be persuaded to provide for their children at an early age (when they need the most help) rather than when they die (when the child is probably already setup) then there would be far fewer problems for the average person.

    For anyone else looking at this, the above advice has made me a millionaire by 34, so it does work, but as mentioned just giving children money won’t change them, so if you don’t give them good morals, good financial advice, the ability to delay gratification, and general life skills, your efforts will be wasted and you may as well have kept the money for yourself.


  17. Adrian,

    I can say I carry zero consumer debt (including auto). I save 20% of my income. I have a reasonable mortgage and a net worth above the top 10% for my age group. I would not say I am financially free, but I am working on it.

    I have a balanced portfolio of real estate, cash, and stocks. If someone is looking to get rich slowly over 30-40 years, don’t get into consumer debt, invest 10% in a no fee S&P 500 index fund and stay there – don’t panic over stuff like the correction last week, buy cars you can afford with very little debt, don’t overspend on a house. Start a business to minimize your tax profile. Sure something bad might happen, deal with it… stand your ground and keep churning, it’ll be fine. Be intelligent, don’t gamble, but take calculated risks that you can live with.

    The S&P 500 has averaged over 10% per year over the last 50 years. As Mr. Smith said 80% of fund managers do not beat it. Why pay them?

  18. Few responses to a few different things here:

    10% is the number that gets thrown around a lot and over a 40-60 year time line this would be a reasonable goal.

    I agree starting a 10-20K/year business would be difficult, especially if you had 2 working parents and any number of children. I wonder, are there minimums for income that give you tax benefits as a small business?

    First thing I thought of when I read this was…child labor laws. I think we know you aren’t abusing your children, but there are many laws covering child labor and in browsing the government website I found that interstate commerce puts a child under the federal labor laws. So if they are filing papers, or packaging things for your e-bay business, chances they are involved in interstate commerce. So I would be wary of those rules and be sure to check it all out.

    And while the children do gain control at 18, I have to believe there is a legal creation that would allow you to set something up that becomes the children’s at some future date. Like a trust fund whose sole assets are the Roth IRA. Just speculating but it may exist.

    Another important thing to keep in mind is that if your business starts and stays small you will need to find 4k/child/year that you aren’t earning above your normal income. If your business can cover those expenses that is fantastic but it may not be the case. 12k/year can be hard to put away in addition to your own savings for retirement, college savings, etc.

    Also, the child has a million dollars but can’t USE a million dollars at 45. There is a 10% early withdrawl penalty before age 65 (i don’t remember the exact age). Not to mention the whole time value of money where inflation eats your money at ~2% a year. I think that is a conservative average inflation value. This means you have to average 12% returns for the same calculation to work out.

    All that stuff being said…EXCELLENT IDEA. This is the type of thing that can have generational value. When you retire with 6 million dollars ON TOP of what hopefully you will have saved and earned in your lifetime, then your children can help their children/grandchildren and the cycle continues.

    Wish I had put more money into my Roth, i had 2k in there at around age 18. 40K at age 18 would have been reaaaaaaal nice.


  19. bad news guys, this is total bullshit. the kiddie tax (as of now) only extends untill age 14. when under 14 years old your kids can recieve the first $850 of wages tax free, the next $850 is taxed at their tax rate (10%) capital gains of 5% and everything over $1700 total is taxed at their parents tax rate.

    so what happens once there over 14? well until next year, 14-18 yr olds are taxed at their tax rate. after jan 1 2008 thanks to some new tax law changes, the kiddy tax extends to age 18. that means workers in highschool now have to pay their parents tax rate on everything over $1700 instead of their own tax rate.

    worse yet, if parents continue to claim them as dependents the children need to pay parents tax rates up until age 24 on any income above $1700. this law is the Tax Increase Prevention and Reconciliation Act of 2005″ (TIPRA)

  20. It isn’t bullshit and it isn’t illegal to employ your own children.
    The law is always changing so check with your accountant before taking a write off.

    Here are some references:
    Tax law regarding employing your children
    Inc Magazine

    There are many nuances to tax law, so check on the details. But you certainly can employ your children and you can open an IRA in their name. Tax law may change.

    The kiddie tax “BS” refers to is not the same as paid wages, it is monies paid for partial ownership. Anyway… he didn’t leave his name or any references, so I’d just count him as a negative nabob.

    Check with your accountant.

  21. From april15.com:

    Reducing Income Taxes. Usually, children (especially minors) are subject to lower tax rates than their parents. In this case, shifting taxable income away from the parents and to their children is an effective way to lower the family’s tax burden. Many income-shifting strategies were effectively killed by the “kiddie tax,” which taxes the unearned income of children under age 14 at their parent’s marginal rate. Fortunately, wages are earned income, so they are not subject to the kiddie tax. Also, children who are claimed as their parent’s dependents usually are limited to a standard deduction of $750 (for 2003). However, the standard deduction for a dependent with earned income equals his or her earned income plus $250 (up to $4,750 for 2003). Thus, up to $4,750 of earned income can be completely sheltered from tax. And, the next $7,000 of wages will be taxed at only 10%.

  22. Here is a link to some info in the Kiddie Tax on “unearned income”:

    Kiddie Tax

    This clearly explains what “BS” mentions. What “BS” doesn’t know is that “earned income” is treated very differently.

  23. Hi Steve!

    Following your front page thread on the year in review, and see your link to how people reacted brought me here.

    I had no clue about any of this… I mean I knew certainly that my son could be an employee of the company, but I had no idea I could help make him money-worry-free in the process. He’s 16 now, and I wish I’d see this 10 years ago! Not only would he be taken care of, but he’d be able to take care of his loving mother :), too!

    Never to late to start??

  24. Very interesting post. I wonder if anyone has any input to this idea. Say my child sets up an LLC and the purpose of that LLC is stock trading. Not investing but trading. So the LLC generates a K1 and that get put on his/her tax return. Do you think that would be treated as self employment income and thus avoid the kiddie tax?

  25. Randy,
    Don’t use an LLC. This is only legal with a sole proprietorship. And be sure to check with your accountant and attorney before you do anything. Some situations can be different than the one above.

  26. Hi Steve,

    Well, it would be my child’s LLC and it would be a single member LLC which would be treated as a sole proprietorship for tax purposes anyway. Just wondering if that would allow my child to then take the gains as self employment income as she would run the company.

  27. So, if I have 100k in the bank earning 5% per year, I have to pay taxes on 5000 of earned income.
    If I have two children, my wife and I can give them 10k each for each child, 20k per child per year without going over the gift tax.
    So, my infant children can earn 850 per year in ’07 tax free and 850 per year additionaly at a much lower tax rate than what I’d have to pay.
    At an age of about 13, I could have my kids give us a 12k gift (current cash tax free gift amount) per year back to me. Thus, I’d have went for at least 10+ years with my 2 kids getting me 3400 woth of income at a very low tax rate? Can anyone confirm if this is correct? I think it is. Now, I’d just have to set up a UGMA for my children so they don’t take the money when they are 12!

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