Billionaire investing mogul Warren Buffett once quipped that he wanted to pass on to his children “enough money so that they would feel they could do anything, but not so much that they could do nothing.” Another gem from the Oracle of Omaha.
We all want to help our kids gain a solid footing in life, including financially if we can. But, even if we could, simply handing them a check for $1 million on their 18th birthday doesn’t set them up for success. An unearned windfall like that in the hands of someone barely old enough to drive just begs for bad judgment, squandered money, and an entitlement mindset.
So how can we help our kids establish a solid financial footing while teaching them important concepts about money and building wealth?
Instead, consider a strategy to set your child up with a wealth-generating engine they can learn from at an early age and which will gradually build significant wealth for them for the rest of their lives. Using this strategy, by the time your child leaves home at age 18, you can help set them up to become multimillionaires with tax-free wealth at their disposal.
Step 1: Get Them an Income
In order for your child to qualify for a tax-sheltered investment account, they need to have taxable income to begin with.
If your kid already works a part-time or seasonal job over the summer or during school breaks, great!
If not, or if they only earn a little spending money this way, you can help them. Hiring your kid part-time to work at your business can do the trick.
Just be sure to mind the laws around employing minors. Legally you’ll have to treat your kid like you would any employee under age 18. The Fair Labor Standards Act (FLSA) sets the minimum age for most nonagricultural work at 14 years old and limits the number of hours they can work. And you can’t assign your kid to hazardous tasks like operating heavy machinery—no sending your teenager into the coal mines, even if you’re tempted sometimes.
You’re a real estate investor, right? Have your kid enter your receipts into your accounting software, conduct basic internet research, or even just shadow you while you do your day-to-day thing.
Some states require minors to obtain work permits or employment certificates from their school or the state’s labor department before they can begin working. You must keep appropriate records of their hours, the tasks they perform, and their pay. The law requires you to pay them at least minimum wage, but how generously you compensate them for their time is up to you.
The key is to get their annual taxable income to the $6,500 threshold. That’s the maximum they can contribute to the tax-sheltered account they need for this endeavor.