I’m Making My Kids Millionaires By Hiring Them and Investing Their Income. Here’s My 10-Step Guide

By the time my kids are in their 30s, they will be millionaires.

That’s because I’ve started investing for them in a custodial Roth IRA, which is a tax-advantaged investment account they can have access to when they’re of age. It could be 18 or 21 years old, depending on the state where the minor lives. Until then, the adult (aka me) maintains control of the account.

In 2020, I got divorced from my husband of seven years. I was forced to move back home with my four kids to live with my mother in Los Angeles, CA, and I was faced with the reality that their financial futures were ultimately in my hands and my hands alone. I had to do something.

I was always really good with money, and knew a good amount about investing. So when President Biden sent all Americans (under a certain income threshold) a $1,200 stimulus check as part of the COVID-19 relief package, I used it to invest in a business. I bought a ring light, an upgraded iPhone, a website domain, and launched my business Ellievated Coaching & Consulting, where I help new and aspiring entrepreneurs scale their business through digital marketing.

My company made its first $1 million in 10 months. 

Now, I employ my kids (ages 7 and 5) and pay them anywhere from $250 to $500 per month to do tasks for my business like cleaning my office, organizing paperwork, and taking pictures. This allows my kids to claim earned income—a requirement for investing in a Roth IRA. The money may not be theirs now, but in the future it will help them tremendously, more than they’ll ever know.

You don’t need to be a 7-figure business owner or have a lot of money to start investing for your kids. With the right information and right investment steps and strategies, all parents can create generational wealth to pass on to their kids. Here’s how I did it. 

You Don’t Need A Lot of Money to Start

If there’s one thing to know about investing, it’s understanding that time in the market is better than timing in the market. Meaning, the longer you let your money sit in the stock market, the longer it has to compound and build wealth. Once I realized this, it kickstarted my yearning to start investing for my kids while they’re still young. It also gives them the ability to learn alongside me about the power of investing. 

When your children have “earned income” working for your company or through another job, they can invest in a custodial Roth IRA which allows the money to grow tax-free. They can then withdraw the money with no penalty at 59 1/2.

Having conversations with your kids early on is what Anna N’jie-Konte, a certified financial planner and founder of Dare to Dream Financial Planning, does with her daughter. Having these finance conversations early teaches her to invest from a young age.  “With my daughter, her grandfather gave her $100 for her birthday,” she said. “I explained that she can have $30 to use for whatever she wants. We then sit together at the computer and I show her the action of transferring the other $70 to her investment account while explaining to her what it means.”

It is a great way to normalize investing for children and build the habit of always setting money aside to invest. 

“The habit of investing is what matters, not details like the amount. Normalize investing and teach your kids that it is required and not an option. That is how you will build a habit,” N’jie-Konte added.

Investing in a custodial Roth IRA provides my kids with the ability to access their money at the legal age, for example to pay for school. The IRS waives the 10% tax penalty for pulling out your money before retirement age on a few exceptions, one being for higher education. Any of these qualified expenses can be used for tuition, fees, books, supplies, and equipment for a student.

The biggest takeaway here is that there is no such thing as too little money to invest. You just have to start.

To give you some perspective: when a child is born, if you invested $2,040 into a custodial investment IRA account without ever investing another dollar, that child would have over $1,000,000 when they’re 65. The money will have sat in an investing account compounding on itself over all those years. That’s with an average rate of return of 10%.

“Little by little, things do add up, especially with compound interest,” says N’jie-Konte. 

How Can You Begin Investing for Your Children?

You don’t have to own a business to start investing for your kids. You can still set them up to be millionaires. 

Be sure to tell your kids what you’re doing each month, and try to make it a process they can be involved in. Show them how to invest, make a budget, and most importantly, teach them how to make their money work for them.

But if you have a company, you can hire your kids and invest their earnings. This will make them eligible for you to open a tax-advantaged Roth IRA in their name. 

When you start a business, you can hire your kids under the age of 18 and pay them up to the standard deduction of $12,550 in 2021, and $12,950 in 2022. That money is fully tax-deductible to you if your business is a sole proprietorship or an LLC taxed as a sole proprietorship. Also, your child will not owe income or employment taxes.

Here’s a 10 step-by-step guide on how you can do this even if you aren’t a full-time business owner. Big thanks to my friend Michel Valbrun, CPA and president of Valbrun Group, LLC, for taking a look and helping me craft these steps:

1. Create a business entity, for example Jones Family Cookies LLC.
2. Generate revenue by selling products or services.
3. Open a business bank account
4. Get an employer ID
5. Create a job description for your child such as office assistant, packaging specialist, cleaner, etc.
6. Pay your child a reasonable wage for service rendered 
7. Require a timesheet
8. Pay with a W-2 payroll check
9. Invest up to $6,000 of earned income per year for them into a custodial Roth IRA
10. Complete the federal and state payroll forms 

Many of my colleagues hire their kids for modeling and advertising in their business and pay them a wage. The wage must be “reasonable for the job” and in comparison to the overall revenue of the business and the number of hours worked as described in the job description. A great way to determine a reasonable wage is to search the market rate for “office assistant,” for example, in your area and align that to what you pay your children.

For example, I currently hire my 7-year- old son and pay him $500 per month. At this rate of investing $6,000 per year in a custodial Roth IRA, by the time he is 19 years old there will be over $100,000 in his account, assuming an average annual rate of return of 10%. 

If you don’t have a business, here are some custodial investment accounts you can use for your children without them having to earn money through a business. 

1. UGMA account – It stands for Uniform Gifts to Minors Act and allows parents to open custodial accounts held in the name of the minor but still controlled by the parents until the child of age (either 18 or 21) in your state.
2. UTMA account – Similar to UGMA accounts, this stands for Uniform Transfers to Minors Act. It allows transferring financial assets to a minor, similar to UGMA, without needing a trust. The minor will have access once they become of age in their state. 
3. 529 College Savings Plan – This is a tax-advantaged investment vehicle where parents can invest money for their child’s higher education expenses and that money can be withdrawn tax-free only when used towards higher education expenses. UGMA and UTMA accounts do not offer tax-free withdrawals as 529 plans do, but they also do not have to be exclusively used towards education.

If your children aren’t technically earning income through a job, you can’t open a custodial Roth IRA. But with these other options, they can still invest and become adult millionaires. 

Bottom Line

Whether you have a business, decide to start one, or have a 9 to 5, you can start investing for your children and make them adult millionaires.

You can start with $25, $50, or whatever you can afford. It will plant the first seed. You can then set automatic transfers to your kids’ investment accounts and help them develop habits to encourage them to continue to build wealth as adults.

You may not come from a rich family, but by taking action today and being consistent, a rich family can come from you.