How many times have you been sitting down to a nice Shabbos dinner, surrounded by your beautiful children, and just thought, “Wow, these kids cost me a ton of money!?” Or maybe you noticed your 8-year-old watching Spongebob Squarepants and was thinking, “When are you gonna get a job already!?” I mean they eat your food, they don’t pay rent, and you need to pay for their schooling. But lucky for you, with the help of a Roth IRA you can turn those freeloaders into millionaires and then it’s your turn to show them how to freeload like a champ.

A Roth IRA is an extremely effective method to save for retirement. Unlike a traditional IRA, you fund a Roth IRA with post-tax dollars but you can then take everything out tax-free. This means everything—not just the principal that you contributed but all the earnings as well. This is what makes this such an attractive option, especially for younger people that have another 30 to 40 years to grow this fund tax-free before they need it. With 40 years of growth this little investment can turn out be quite a large nest egg.

In order to turn that kid into a millionaire you need to follow these steps:

Step 1: The kid needs a job since the IRA can only be funded with earned income. You may think this sounds crazy because there’s probably not much demand in the job market with someone with “extensive coloring experience” or a “vast knowledge of the ABC’s.” But the truth is, the absolute best way is if you have your own business and you hire them to do some small tasks (i.e. cleaning the office, filing papers). Hiring your own child is the ultimate win-win since not only is your child receiving money, but you get some nice tax breaks as well. The wages you pay to your child are deductible as a valid business expense so it shifts some of your taxable income away from you, plus unlike a normal employee, you don’t have to pay unemployment taxes for your child/employee under 21 years old or even FICA taxes if the child/employee is under 18 years old.

But what if you don’t have your own business so you can’t just hire him yourself? Try to farm out Junior to a friend, neighbor, or maybe even your own employer and see if they would hire him to do some small tasks around the office. I’m sure if you look hard enough  someone can use a kid to do some filing or organizing around the office every so often or even in the summers.

Step 2: Setup a Roth IRA for your child. Most major financial institutions allow you to setup an account in your child’s name. It will most likely need to be a custodial or guardian account which prevents the child from withdrawing from the account before turning 18 without your consent.

Step 3: Fund the Roth IRA account with the child’s earnings and watch it grow.

To see how effective this strategy is let’s look at an example. First, let’s assume you have your own business and hire your own child. As stated earlier, this can be extremely beneficial to both you and your child. Let’s say you pay your child $5,500 a year (the maximum yearly IRA contribution) to do various tasks around your office starting at age 10 for 10 years. Firstly, you have legally shifted $5,500 of taxable income away from you which amounts to $1,540 in taxes each year if you’re in the 28 percent tax bracket. Secondly, you have funded $55,000 into your child’s retirement fund by the time they are 20 years old. Even if we assume not a single penny more will be deposited into that account, there is still 40 years for that $55,000 principal to grow. Now, the average rate of return for the S&P 500 for the past 50 years has been just over 11 percent. So assuming the same rate of return then that little $55,000 nest egg will be worth over $3.5 million by the time the little rugrat can begin withdrawing at age 59½. Even if you assume an 8 percent return it would still be over $1 million.

But let’s now assume you don’t have your own business and you can’t find someone that will realistically pay your child $5,500 a year. Between summer jobs and babysitting they manage to earn a total of $15,000 in that same 10-year span. That $15,000 investment would be worth more than $1 million by age 59½ assuming the 11 percent rate of return. Obviously these numbers grow exponentially if the child continues to fund the Roth IRA as time goes on.

You may look at your child a little differently now. Instead of just seeing an allowance-sucking garbage disposal, you may just see the sweet, sweet image of dollar signs now. When he has over $3 million extra in his pockets because of you, be sure to remind him how he got that money. You may want to also remind him how much he cost you. While you’re at it you can remind him that you can use a new car.

Daniel Magence, CPA, Esq. is a principal at Pristine CPA Solutions, LLC (www.pristinecpa.com). Pristine CPA Solutions offers tax and accounting services to individuals and businesses of all sizes, whether its tax returns, problems with the IRS, bookkeeping, or personal income budgeting. He can be reached at [email protected] or 201-326-6908 if you have any questions or comments, or are interested in using Pristine CPA’s services. Feel free to contact us for a free consultation.

By Daniel Magence