How to Open a Roth IRA for Your Kids (and Why You Absolutely Should)

Some lessons aren’t taught in classrooms. They’re absorbed standing behind the counter, tallying receipts, or shadowing you through the daily rhythm of your small business. That’s the beauty of bringing family into the fold. And while jokes about nepotism abound, the truth is this: hiring your kids or family members, when done thoughtfully, can be one of the smartest, most rewarding moves you make as a small business owner. This isn’t just about passing out paychecks or keeping things "in the family." It’s about legacy, values, mentorship, and yes—even some practical tax benefits. It’s about building something that lasts, together.

Trust and Mentorship

In business, trust is everything. You can spend years hiring and training people who may never care as much as you do. But when you hire your kids or relatives, you start with a foundation built on loyalty and shared vision. That personal connection doesn’t mean standards drop. In fact, it often pushes family members to work harder. They’re not just employees—they’re stewards of the family name. More than that, hiring your kids gives them something no summer job can: mentorship in real time. They learn client interaction, basic accounting, problem-solving, and how to stay calm when everything hits the fan. These aren’t lessons from a textbook—they’re earned side by side with you. It’s also a chance to strengthen your family bond in ways dinner conversations just can’t. You share stories, navigate challenges, and celebrate wins as a team. Yes, disagreements will happen—but they’re part of the growth process.

The Real Tax Benefits of Hiring Your Kids

Let’s not ignore the financial perks. In fact, the tax advantages of hiring your children can be so significant, they often surprise even seasoned entrepreneurs. If you’re operating a sole proprietorship or a partnership where both parents are partners, you’re in one of the best positions to benefit from this strategy. For sole proprietors or parent-owned partnerships, hiring your child under 18 can offer real tax savings. Their wages may not be subject to certain taxes, and their income might fall under the standard deduction, making it tax-free. Your business gets to deduct the wages, too. As long as the job is real and the pay is fair, it’s perfectly legitimate—and savvy. But let’s break this down more clearly:

• No Payroll Taxes: If your child is under 18 and works for your sole proprietorship or a partnership consisting only of the child’s parents, you are not required to withhold or pay Social Security or Medicare taxes.

• No Unemployment Taxes: You’re also off the hook for FUTA (federal unemployment tax) for your child under 21.

• Standard Deduction Shield: As of 2024, the standard deduction is $14,600. That means your child can earn up to this amount tax-free. If you pay them wages within that threshold, neither they nor you pay federal income tax.

• Business Expense Deduction: Their wages are a deductible business expense, lowering your taxable income.

Let’s say you pay your teenage child $12,000 a year to help with marketing, inventory, or bookkeeping. That money is tax-free to them and fully deductible to you. Instead of the money sitting in your business account getting taxed, it’s shifted to your child—who might then invest it, save for college, or learn to manage money firsthand.

This isn’t a loophole. It’s smart planning. Just be sure to follow IRS guidelines:

• The work must be necessary and real (no made-up positions).

• The pay must be reasonable for the task.

• Hours should be tracked.

• Payment should go through payroll and be documented.

With a little structure, the financial benefits are both legal and significant.

But let’s go even deeper:

1. Shifting Taxable Income

Think of it this way: instead of your business earning $12,000 more and paying self-employment taxes on it, your child earns that $12,000 and pays zero in federal tax (if under the standard deduction). That’s money you’ve effectively moved from a high tax bracket (yours) to a zero bracket (theirs). It’s a classic tax-splitting strategy—and it’s IRS-approved when documented properly.

2. Roth IRA Contributions

Once your child has earned income, they become eligible to contribute to a Roth IRA. That means they can take some of that $12,000 income and invest it into an account that will grow tax-free for decades. Even $2,000 invested at age 14 can compound to over $100,000 by retirement. By hiring your kids, you’re opening the door to generational wealth-building tools.

3. College Planning Strategies

If you’re saving for college, having your child earn their own income can reduce the amount you need to contribute from your taxed business revenue. Even better? Their earnings may help reduce your family’s Expected Family Contribution (EFC) when applying for financial aid, depending on how assets are structured

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4. Health Reimbursement Arrangements (HRAs)

With a formal plan in place, you could pay your child and then use an HRA to reimburse them tax-free for qualifying medical expenses. While this requires setup and compliance, it can be a smart, bundled benefit that keeps dollars in your household instead of going to insurers or the IRS.

5. Training Ground for Financial Literacy

These tax strategies aren’t just beneficial to your books—they’re teachable moments. Kids begin to understand how taxes work, what withholding means, how to budget and save, and how to legally keep more of what they earn. You’re not just minimizing taxes. You’re maximizing education.

Employer Matching for Kids and Tax Deductibility

One question that often comes up when business owners hire their kids is whether they can "match" their child's Roth IRA contributions like a traditional employer might, and whether that match is tax-deductible. Here's the short answer: You can match it—but it won’t be deductible unless it’s structured properly, and not in the way most business owners think. Roth IRAs are individual retirement accounts, which means they’re not linked to employer-sponsored plans like 401(k)s. As such, the IRS does not allow employer contributions or matching to a Roth IRA. The only money that can go into a Roth IRA must be the child’s own earned income, up to their annual limit ($6,500 in 2024 or their total earned income, whichever is lower).

That said, if you're a parent who wants to "match" what your kid earns to reward savings habits or double their investment power, you can do this informally. For example:

• Your child earns $2,000 working in your business.

• You let them keep their pay and you contribute $2,000 to their Roth IRA on their behalf.

• As long as the child has earned income and the contribution doesn’t exceed that earned income, it’s completely legal.

This type of informal matching is not tax-deductible for you, and it's treated just like any other Roth IRA contribution by the IRS. But from a family wealth-building perspective, it’s incredibly powerful.

If you’re interested in more formal matching contributions that offer business deductions, you’d need to explore setting up a qualified retirement plan for employees—like a SEP IRA or 401(k)—which comes with more regulatory requirements and may not make sense unless you have multiple employees.

Still, even without the deduction, informal matching is a powerful way to reinforce the habit of saving and investing. It shows your child that good money habits are rewarded, and it effectively supercharges their Roth IRA while still keeping everything within legal limits.

Building Work Ethic and Entrepreneurial Spirit

Beyond the money, you’re also instilling a work ethic. Your kids see that success takes effort. They take pride in doing a job well. Whether they stick around or branch out, they’ll carry that pride—and those skills—into whatever comes next. And when kids grow up seeing what it takes to run a business, it normalizes entrepreneurship. They realize that business ownership isn’t something "other people" do—it’s something they can do. You’re laying the groundwork for future creators, problem solvers, and leaders. Some of them may go on to start businesses of their own. Others may work for companies with a stronger sense of responsibility and initiative because they’ve seen how decisions are made behind the scenes. Either way, the mindset sticks.

Roles That Grow With Them

The flexibility of a family-run business can’t be overstated. You can shape roles to fit your family members’ strengths and interests. Maybe your teenager starts organizing files but grows into managing social media or helping with customer service. Maybe a college student steps in during breaks to help with marketing. You're not boxed in by corporate red tape. And if you dream of passing the business down someday, this is the on-ramp. They’ll know the systems, the customers, the quirks. They’ll be ready to lead—or at least support—in meaningful ways. Even if they choose a different path later, the business remains a part of their foundation. The experience also helps them discover what they like and what they don’t. Working in the business lets them explore different roles—from tech to communication to logistics—and develop transferable skills along the way.

Navigating Family Dynamics and Common Pitfalls

Of course, working with family isn’t always smooth sailing. You’re still going to have tension, off days, and moments where personal relationships bleed into professional expectations. That’s normal. But it’s also manageable—if you're proactive about it.

• Set clear boundaries. Just because someone is family doesn’t mean they should be involved in every decision or conversation. Define working hours and stick to them. Avoid letting business discussions dominate family dinners or weekends unless it’s mutually agreed upon.

• Create defined roles. It’s essential that everyone understands what their job is—and what it isn’t. Write job descriptions just as you would for a regular hire. This reduces confusion, duplication of effort, and the classic “too many cooks in the kitchen” scenario.

• Use formal onboarding and feedback processes. Even if your child is just helping out for the summer, treat the onboarding process seriously. Explain expectations, provide training, and give them an orientation to your systems. Then, schedule regular feedback sessions. Keep the lines of communication open—and professional.

• Document everything. From payroll to hours worked to performance conversations, good documentation protects your business. It ensures compliance with labor laws and keeps things fair if conflicts arise. It also helps the child or family member take their role seriously.

• Avoid favoritism at all costs. If you have non-family employees, they need to see that everyone is treated equally. Favoritism—real or perceived—can tank morale. Be transparent about why family is involved, and hold them to the same standards as everyone else (or even higher).

• Have a conflict resolution plan. Don’t wait for issues to fester. If tension arises, address it quickly in a neutral setting. Sometimes, a short check-in or mediation-style conversation can prevent long-term fallout.

• Know when to draw the line. Not every family dynamic works well in a business setting. If it’s damaging your relationship or the company’s progress, it may be better to pause or reassign roles. The health of the family and the health of the business should always reinforce—not compromise—each other.

  
  

When you approach hiring family with structure, fairness, and clarity, the common pitfalls become manageable challenges instead of deal breakers. The goal isn’t perfection—it’s alignment. When everyone understands their role and feels valued, your business becomes a training ground not just for skills—but for leadership, trust, and long-term growth.

Planting Seeds of Legacy

Even if your children don’t stay in the business, you’ve given them a gift: the mindset of an entrepreneur. They’ve seen what it takes to build something. They know how to show up, problem-solve, and stay accountable. That’s a legacy far greater than just money—it’s the foundation for future independence. You're also giving them something deeper—something cultural. You’re showing them that family can be a team, that business is about service, and that building something of your own is a noble path.

Final Thoughts: The Family Business Advantage

So the next time you consider your next hire, take a look at the people already around your dinner table. You might just find your most loyal, capable, and invested team member sitting right there. When your business grows alongside your family, you’re not just building income. You’re building impact, purpose, and legacy. And that’s a return no salary can match.

Looking for more ways to build sustainable business growth with real impact? Stick around the blog. We’re here to help you grow smart, local, and legacy-first.