Kylie Jenner Created $14 Million Tax-Free Dollars For Her Daughter With This Loophole— and You Can Too!
In this episode of Money Rehab with Nicole Lapin, the host explores custodial Roth IRAs, an often overlooked wealth-building strategy where parents can contribute their child's earned income to a tax-advantaged retirement account. By discussing high-profile examples like Kylie Jenner funding an account for her daughter Stormi, the episode illustrates the immense growth potential of starting retirement savings early.
The podcast offers practical advice on setting up custodial Roth IRAs, generating earned income for children through activities like entrepreneurial endeavors, and maximizing investment growth. It also highlights how funds can later be withdrawn tax-free for qualified education expenses, making these accounts a flexible option for families prioritizing college savings.
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1-Page Summary
Custodial Roth IRAs and Their Benefits
Custodial Roth IRAs, funded with a child's earned income, offer a unique way for parents to help children start saving for retirement early. The podcast highlights the key benefit of Roth IRAs: tax-free distributions in retirement, unlike traditional IRAs where withdrawals are taxed.
Setting Up and Investing
Parents can open custodial Roth IRAs through major brokerages and actively invest the funds, as the podcast advises, commonly in low-cost index funds like the S&P 500 to maximize growth.
Leveraging for Children's Financial Future
High-profile examples like Kylie Jenner's daughter Stormi and Beyoncé's Blue Ivy illustrate how custodial Roth IRAs can build substantial wealth. But even without celebrity income, any child's earnings from activities like lemonade stands or jobs can fund an account.
Earning Opportunities
The podcast suggests parents encourage entrepreneurial activities to generate income for contributions. Those with businesses can also employ children and direct their pay into custodial Roth IRAs.
Setting Up and Managing Accounts
To set up a custodial Roth IRA, parents must confirm their brokerage offers them. Once opened, they can contribute up to the annual limit using the child's earned income and actively invest those funds.
Tax Advantages for Education
Beyond retirement, the podcast notes Roth IRAs offer flexibility to withdraw funds penalty-free for qualified education expenses like tuition. Starting contributions early allows potentially sizeable balances by college age to cover such costs.
1-Page Summary
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Counterarguments
- While Roth IRAs offer tax-free growth, they require the child to have earned income, which may not be feasible for all children, especially at a very young age.
- Investing in low-cost index funds like the S&P 500 is generally a sound strategy, but it may not be suitable for everyone, as it still carries market risk and may not align with individual risk tolerances or investment goals.
- The idea that any child's earnings can fund a custodial Roth IRA may overlook the complexities of tax laws regarding what constitutes earned income for minors.
- Encouraging entrepreneurial activities in children is positive, but it may also place undue pressure on children to earn money and contribute to a retirement account, potentially at the expense of other childhood experiences.
- Employing children in a family business for the purpose of funding a Roth IRA must be done in compliance with labor laws and fair compensation practices.
- While custodial Roth IRAs can be used for qualified education expenses, this may not always be the best financial strategy, as it could reduce the amount of money available for retirement.
- The focus on building substantial wealth through custodial Roth IRAs may set unrealistic expectations for average families who may not be able to contribute regularly or in significant amounts.
- The narrative that starting contributions early will lead to sizeable balances by college may not account for the impact of inflation, investment returns, or the possibility of financial setbacks.
Actionables
- You can create a visual savings tracker with your child to illustrate the growth of their Roth IRA contributions. Set up a chart that represents the IRA balance and let your child color in sections as they make contributions from their earnings. This tangible representation can make the concept of saving and interest more concrete for young minds and encourage consistent saving habits.
- Organize a family 'Shark Tank' style event where your children can pitch small business ideas to you. Offer a small investment for their best ideas and use the profits to contribute to their custodial Roth IRAs. This not only teaches them about entrepreneurship but also about investing in their future.
- Develop a matching contribution plan for your child's income, similar to an employer's 401(k) match. For every dollar your child earns and contributes to their Roth IRA, commit to matching a certain percentage. This incentivizes them to save more and teaches them the value of employer match programs they may encounter in the future.
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Custodial Roth IRAs and their benefits
Custodial Roth IRAs present a unique opportunity for parents to introduce their children to the benefits of saving for retirement, utilizing the advantages of a Roth IRA's tax structure and the potential for long-term growth.
Custodial Roth IRAs allow parents to set up tax-advantaged retirement accounts for their children, leveraging the power of compound interest to build significant wealth over time.
A custodial Roth IRA is an account set up for a child by a guardian where money contributed is grown tax-free until retirement. The podcast notes that these accounts are funded with income the child has earned from sources such as modeling, acting, or part-time jobs, contributing up to the allowable limit.
The tax-free distributions in retirement are a major benefit of Roth IRAs, as opposed to traditional IRAs where withdrawals are taxed.
One of the key advantages of Roth IRAs, highlighted in the podcast, is that, unlike with traditional IRAs, distributions are tax-free upon retirement. This benefit is a crucial differentiator for Roth IRAs and contributes to their appeal for long-term savings.
Custodial Roth IRAs can be set up with most major brokerages, and the guardian must actively invest the contributed funds to maximize growth.
Setting up a custodial Roth IRA is typically straightforward and can be done through most major brokerages, likely the same ones parents use for th ...
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Custodial Roth IRAs and their benefits
Additional Materials
Counterarguments
- While custodial Roth IRAs can be beneficial, they require the child to have earned income, which may not be feasible for all children, especially at younger ages.
- The focus on Roth IRAs may overlook other valuable savings vehicles for children, such as 529 plans for education expenses, which also offer tax advantages.
- The long-term benefits of compound interest assume that markets will continue to perform positively over time, which may not always be the case, and there is a risk of loss.
- Tax laws and retirement regulations can change, potentially affecting the future benefits of Roth IRAs.
- Actively managing investments can be time-consuming and requires a certain level of financial literacy, which not all guardians may possess.
- The recommendation to invest in low-cost index funds, while generally sound, may not be suitable for all investment strategies or risk tolerances.
- There is a risk that children may not l ...
Actionables
- You can create a visual savings tracker for your child to illustrate the growth of their Roth IRA contributions over time. By using a simple chart or graph that they can color in as their savings increase, you help them understand the progress and encourage a habit of regular contributions. For example, set up a poster with a thermometer design that represents their savings goal, and each time they contribute, they color it a bit higher.
- Consider matching your child's contributions to their Custodial Roth IRA to incentivize their savings behavior. If they earn money from a part-time job or chores, offer to match a percentage of what they save, effectively doubling their investment. This not only boosts their savings but also teaches them the value of employer match programs they might encounter in the future.
- Engage your child in age-appropriate ...
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Leveraging Custodial Roth IRAs for children's financial future
Custodial Roth IRAs are becoming a popular method for securing a child's financial future, with high-profile cases illustrating their potential. Even children from non-celebrity families can benefit significantly from these accounts.
High-profile examples like Kylie Jenner's daughter Stormi and Beyoncé's daughter Blue Ivy show how Custodial Roth IRAs can build substantial wealth for children.
Kylie Jenner might have secured her daughter Stormi’s financial future by setting up a Custodial Roth IRA with the income Stormi earned from appearing in a Kylie Cosmetics commercial at the tender age of two. If Stormi continues to maximize her Roth IRA contributions yearly, she could amass over $14 million tax-free by retirement.
Similarly, Beyoncé's daughter Blue Ivy could be reaping the benefits of her earnings through a Custodial Roth IRA. Blue Ivy has the advantage of having earned income from her performances as a backup dancer for her mother and the use of her crying audio in Jay-Z's song "Glory," starting from infancy.
Even without celebrity-level income, any child's earned income can be used to fund a Custodial Roth IRA and create a sizable retirement nest egg.
Children without celebrity-status can still create substantial retirement savings through Custodial Roth IRAs by allocating their earned income, regardless of scale, toward this long-term investment.
Parents can leverage common child entrepreneurial activities like lemonade stands, yard sales, and dog walking to generate income that can be contributed to a Custodial Roth IRA.
Everyday entrepreneurial ventures like lemonade stands, yard sales, and dog walking are not only charming childhood activitie ...
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Leveraging Custodial Roth IRAs for children's financial future
Additional Materials
Counterarguments
- While Custodial Roth IRAs can be beneficial, they require earned income, which may not be feasible for all children, especially at a very young age.
- High-profile examples may set unrealistic expectations for average families whose children may not have the same earning potential.
- The impact of early financial education through managing a Roth IRA may be overstated, as children may not fully grasp the complexities of investing and retirement savings at a young age.
- Using income from child entrepreneurial activities may not be consistent or substantial enough to make a significant impact on long-term savings.
- There may be legal and tax complexities associated with employing one's own children, which could create barriers for some parents.
- The focus on Roth IRAs may overlook other important aspects of financial literacy and education for children.
- There is a risk that emphasizing financial investments for c ...
Actionables
- You can create a visual income tracker for your child to illustrate the growth of their Roth IRA contributions from various activities. Start by setting up a simple chart or board in your home where your child can add stickers or markers for every dollar they earn from chores or small jobs. This tangible representation can make the concept of saving and investing more concrete and engaging for them.
- Consider setting up a family craft or produce stand if you have a garden or a knack for homemade crafts. Teach your child about the value of money by having them help create items to sell, such as handmade jewelry, homegrown vegetables, or baked goods. The earnings can then be funneled into their Roth IRA, showing them how creativity and entrepreneurship can contribute to their financial future.
- Encourage your child to offer tech support or tut ...
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Steps to set up and manage a Custodial Roth IRA
A Custial Roth IRA offers parents the ability to invest in their child’s future. Here's how to set one up and manage it effectively.
Setting up a Custodial Roth IRA
To establish a Custodial Roth IRA, a parent must first ensure that their brokerage offers Custodial Roth IRAs, as not all platforms provide this option. If they do, the parent can typically open the account through that same brokerage.
Ensuring the brokerage supports Custodial Roth IRAs
It's important at the beginning to confirm whether the chosen brokerage supports Custodial Roth IRAs. Parents should do this before attempting to open an account.
Contributing and Investing in the Custodial Roth IRA
Once the Custodial Roth IRA is open, the next steps involve funding and managing the account. Parents must contribute up to the ...
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Steps to set up and manage a Custodial Roth IRA
Additional Materials
Counterarguments
- Not all families may have the financial capacity to consistently contribute the maximum allowed each year to a Custodial Roth IRA.
- The assumption that contributing the maximum will lead to substantial balances by retirement does not account for potential economic downturns or poor investment performance.
- Active investing requires knowledge and time, which not all parents may have; passive investment strategies might be more suitable for some.
- The focus on maximizing account growth doesn't consider the child's potential need for funds before retirement age, such as for education or a first home purchase.
- The text does not address the tax implications or the specific rules regarding withdrawals, which are important for managing a Custodial Roth IRA eff ...
Actionables
- You can set up automatic transfers from a child's bank account to their Custodial Roth IRA to ensure consistent contributions. By linking their savings or checking account to the IRA, you can automate the process so that a portion of their earned income is transferred directly into the investment account. This removes the need to remember to make manual contributions and helps in building the investment habit early on.
- Create a family investment challenge to engage your child in the process of investing within their Custodial Roth IRA. Set goals together, such as reaching a certain account balance by the end of the year, and track progress with a visual chart or app. This can make the concept of investing more tangible and exciting for them, and it encourages financial literacy from a young age.
- Encourage your child to seek out income-generating opportunities tha ...
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Tax advantages of Roth IRAs and using them for education expenses
Roth IRAs offer numerous tax advantages and even provide options for covering education expenses, making them a versatile financial tool for both retirement and college planning.
The tax-free distributions in retirement are a major benefit of Roth IRAs, as opposed to traditional IRAs where withdrawals are taxed.
One of the major benefits of a Roth IRA is that investments grow tax-free, and distributions taken during retirement are also not taxed. This is in stark contrast to traditional IRAs, where withdrawals are taxed at the individual's current income tax rate.
This tax-free growth allows Custodial Roth IRA balances to compound exponentially over time.
The benefit of tax-free growth is particularly powerful when a Roth IRA is started early in life. With a Custodial Roth IRA, for example, a parent or guardian can start investing on behalf of a child. Due to the power of compounding, even small contributions can grow significantly over time.
Roth IRA funds can be withdrawn penalty-free to cover qualified education expenses, making them a valuable tool for college planning.
Roth IRAs are not only for retirement savings. They offer the flexibility to withdraw funds penalty-free for qualified education expenses such as college tuition. Th ...
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Tax advantages of Roth IRAs and using them for education expenses
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Counterarguments
- While Roth IRAs do offer tax-free growth, they are funded with after-tax dollars, which may not be advantageous for individuals who expect to be in a lower tax bracket in retirement.
- The benefit of tax-free distributions in retirement assumes that tax rates will not be lower in the future, which is uncertain.
- Investments in Roth IRAs do grow tax-free, but this assumes that the investments chosen will perform well, which is not guaranteed.
- Roth IRAs have income limits for contributions, which may exclude higher earners from taking advantage of this retirement vehicle.
- Using Roth IRA funds for education expenses can deplete retirement savings, which may not be the best financial strategy for all individuals.
- The focus on using Custodial Roth IRAs for education expenses may overlook other education savings options that could be more beneficial, such as 529 plans, which also offer tax advantages and are specifically designed for education ...
Actionables
- You can simulate the growth of a Custodial Roth IRA using online investment calculators to visualize potential future savings for your child's education. By inputting hypothetical contribution amounts and an estimated annual return rate, you can project how much the account could grow over time. This exercise can help you determine how much to contribute regularly to reach your desired savings goal by the time your child reaches college age.
- Create a "Roth IRA Challenge" where you commit to transferring a small amount of money, such as the cost of a daily coffee, into a Roth IRA to develop the habit of saving. Over time, these small contributions can add up and take advantage of the tax-free growth. This strategy turns saving into a routine practice and emphasizes the impact of consistent, small actions on long-term financial health.
- Engage in a "Roth IRA Education Sprint" by dedicating one month to learning abo ...
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