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Business Owner Deduction Could Lead to ROTH IRA Contributions – Finger Financial Five #96

Jeremy
Jeremy

“The two most powerful warriors are patience and time.” – Leo Tolstoy, War and Peace

My dad said, “save for a rainy day.” As a 4-year-old, I thought rain cost money. I put my allowance in an old cigarette pouch my grandma gave me. There are better places to put money.

If you have earned income, you can contribute to an IRA. If you are under certain income limits, you can put your money in a ROTH IRA. Yes, even a 4-year-old can put money in a ROTH IRA, if they have earned income. 

Business owners can hire their kids or grandchildren. This needs to be for legitimate tasks, like models for brochures or taking out trash. The business owners may be able to get a payroll deduction. The children or grandchildren can use the earned income to qualify for a ROTH contribution. 

A ROTH IRA is likely best because they will not have much income to get a meaningful tax deduction from Traditional IRA. The limit on what can be contributed is 100% of earned income to a maximum of $6000 each year (in 2022).  

Starting early can have massive benefits. The investments have more years to compound because they are starting early. 

For example:

If you started saving at age four $1000 a year and got a hypothetical 8% return, you would have roughly $1.5 million by the time you turn 64.

Total deposited is under $60,000 and account value $1.5 million. 

If you started investing $1000 a year at age 21 until age 64 and the same 8%, you would have just over $400,000.

$1.1 million less than if you started just 17 years earlier. 

This is reason Albert Einstein once described compound interest as the “eighth wonder of the world,” saying, “he who understands it, earns it; he who doesn’t, pays for it.

There are many lessons that can be taught in encouraging saving and investing. If a child has an allowance, have them pay part or all their bills. My son uses a specific credit card for gas and food. Giving him the money and then asking him to pay for the card, he starts to see where the money goes.  

He also begins to understand (hopefully) that the more you spend, the less you can invest. Some clients “match” their kids’ investments. If the child invests $1000 the parent adds another $1000. Kind of like an adolescent 401k match. 

For a beginner’s guide to building wealth for students, click here. 

If you have any questions, feel free to email me at [email protected] or click here for a phone appointment. 

On the lighter side, I am starting to feel Elliott being on the cusp of leaving for college next year. Our time is so limited. I am no longer leaving for work so early. Instead, I read at home and see him off to school. I should have started that sooner. 

Hope all is well with you and your family,

Jeremy

Finger Financial Five – 5 points in 5 minutes or less – is to provide you with a weekly shot of useful financial information.  My intention is to share principles, so that you will have more clarity and peace, that help you make better financial decisions.

Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor; DBA Riverbend Wealth Management.

This content is developed from sources believed to be providing accurate information and provided by Riverbend Wealth Management. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

 *Note: an allowance does not count as earned income to qualify for ROTH IRA contributions.

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