We all want our kids to grow up with strong financial habits, a solid work ethic, and the confidence to make smart financial decisions as adults. In a previous article, we talked about how to lay the groundwork for financial success early on—using strategies like allowance systems, budgeting, and even basic investing principles. Now, let’s take it a step further: helping your child kickstart their long-term, tax-friendly investing journey with a Custodial Roth IRA. By involving your child early on in your practice, you not only help them become financially savvy but also potentially enhance your own succession and estate planning strategies.
What Is a Custodial Roth IRA?
A Custodial Roth IRA works similarly to a standard Roth IRA, with one key difference: the account is managed by a custodian (often the parent or guardian) until the child reaches the age of majority, typically 18 or 21, depending on your state.
Who Can Fund a Custodial Roth IRA?
To contribute to a Custodial Roth IRA, your child must have earned income from employment or self-employment. This could include traditional jobs like part-time work or side gigs like babysitting or lawn mowing. The maximum annual contribution is the lesser of your child’s earned income or the IRS contribution limit. In 2024, the Roth contribution limit is $7,000. If your child earns $4,000, then $4,000 can be contributed to their Custodial Roth IRA. If they earn $10,000, then only $7,000 could be contributed.
As the custodian, you can also contribute your own funds to their account, but, again, the total annual contributions cannot exceed your child’s earned income or the IRS contribution limit, whichever is lower.
Integrating Your Child into Your Practice
As a CPA, you may have advantages that others might not if you run your own firm. One way to help your child meet the “earned income” requirement is by hiring them to work in your practice. Whether it’s assisting with administrative tasks, organizing files, or scanning documents, your child can earn a paycheck and contribute a portion of it to a Custodial Roth IRA, or you can make contributions on their behalf and let them keep their earnings.
Hiring your child can come with specific tax advantages for your business. Firstly, you can deduct all wages as a business expense. Secondly, if your business is a sole proprietorship or a partnership owned solely by you and your spouse, your child’s earnings may be exempt from Social Security and Medicare (FICA) taxes, saving both your child and your business money. This means that your company may not have to contribute its own share of FICA taxes either (as long as your child is under the age of 18). If your practice is structured as an S Corporation or includes other partners, this exemption does not apply, and FICA taxes will be withheld as usual.
Keep in mind that the work must be legitimate, and wages should be at fair market value. So, while you can’t pay them $1,000 to shred a stack of papers, you can legitimately hire them for age-appropriate tasks that support your business.
The Power of Compound Gains Over Time
Let’s take a hypothetical example. Imagine you hire your child at your practice starting at age seven and contribute $5,000 annually to their Custodial Roth IRA until they turn 18. After that, let’s assume they make no further contributions, but the account grows at an average rate of 7% per year.
While investment returns can vary and are not guaranteed, under this scenario, your child’s IRA could potentially grow to over $2 million by the time they reach 65. That’s based on a $60,000 total contribution over 12 years!
No Penalty for Early Withdrawals on Contributions
Should your child need to access the funds before retirement, one of the advantages of a Roth IRA is that contributions (not earnings) can be withdrawn at any time without penalties. Plus, they can withdraw up to $10,000 of the account’s earnings for the purchase of a first home without penalty, making the Custodial Roth IRA flexible for future needs beyond retirement.
Estate and Succession Planning
Involving your child early not only teaches them the ins and outs of the business but also lays the groundwork for a smoother transition. As things currently stand, around 70% of family-owned businesses fail or are sold before the second generation gets a chance to take over. By giving your child hands-on experience now, you might increase the likelihood of your business surviving through consecutive generations.
Benefits of the S Corporation
If your goal is to bring your children into the business as adults and give them an active role in management, structuring your business as an S Corporation can be a tax-efficient way to do so. An S Corp allows for pass-through taxation, meaning profits and losses flow directly to shareholders, avoiding double taxation at the corporate level. This structure is ideal for family members who are actively involved in the business and want to take on leadership roles without complicating the company’s tax situation.
Benefits of Family LLC and Family Limited Partnerships
With the Tax Cuts and Jobs Act (TCJA) set to expire at the end of 2025—and lifetime estate tax exemption limits expected to approximately halve as a result—now is a crucial time to consider restructuring your company for more efficient succession planning. If estate planning is your primary concern, or if your children aren’t interested in actively running the business, a Family LLC or Family Limited Partnership (FLP) may be a better fit.
These structures allow for gradual ownership transfers, reducing your taxable estate while retaining control. In a Family Limited Partnership (FLP), general partners (typically senior family members) maintain full control, while limited partners have ownership but no say in daily operations. In a Family LLC, control can be more flexible, depending on the stipulations within the operating agreement. Family members can hold ownership interests without being involved in daily operations, making these models ideal for passing down wealth in an efficient manner.
Additional Strategies to Consider
If you’d like to go beyond the Custodial Roth IRA, or if your child simply doesn’t qualify for one, there are a few other strategies you may want to consider that can simultaneously reduce your taxable estate while helping set your child up for future financial success.
UGMA/UTMA Accounts
UGMA and UTMA accounts are custodial brokerage accounts that allow you to transfer assets like cash, stocks, or bonds to your child while maintaining control until they reach adulthood (usually 18 or 21, depending on the state). Contributions are considered gifts and count toward the annual gift tax exclusion ($18,000 in 2024). The funds can be used for anything once your child takes control, unlike the restrictions of a 529 plan or Custodial Roth.
529 College Savings Plans
College is getting more and more expensive. A 529 Plan can help your child save for college in a tax-efficient way, offering tax-free growth and tax-free withdrawals for qualified college expenses. One strategy to maximize savings is ‘superfunding,’ which allows you to contribute up to five years’ worth of annual gift tax exclusions in one lump sum. In 2024, the contribution limit for superfunding is $90,000 per beneficiary ($18,000 x 5). Couples can double this amount, contributing up to $180,000 per child, by each parent contributing $90,000. Keep in mind, when superfunding, you’re using up the gift tax exclusion for the next five years.
Final Thoughts
As September rolls in and the school year begins, it’s an ideal time to focus on your child’s future—not just academically but financially and professionally as well. Starting young can instill financial discipline, provide invaluable business experience, and give them a head start on long-term wealth building. Whether through a Custodial Roth IRA, strategic business structures, or other tax-advantaged accounts, the earlier you start, the greater the potential impact.
If you’re interested in exploring how a Custodial Roth IRA, business structuring, or other accounts might fit into your family’s financial strategy—especially if you’re considering hiring your child at your firm—click below to arrange a consultation. We’re here to help you navigate these options and tailor a plan that aligns with your family’s goals and values.
