The Millionaire Parent Strategy: Paying Your Children and Funding Roth IRAs

Introduction: Give Your Kids a Job, And a Tax-Free Head Start

What if your child could become a millionaire, without inheritance, without winning the lottery, and without waiting until retirement?

Here’s the strategy the wealthiest business owners quietly use: pay your children a fair wage through your business, then fund a Roth IRA with their earned income. It’s legal, smart, and wildly effective over time.

This isn’t just a tax savings trick. It’s a method to:

• Reduce your taxable income

• Keep wealth in the family

• Teach financial responsibility early

• Create a tax-free investment vehicle your child can access in retirement (or earlier, with rules)

  
  

In this blog, we’ll break down the mechanics of child payroll, Roth IRA rules for minors, long-term growth examples, and how to do this right—so you don’t get tripped up with the IRS.

Why Pay Your Children Through Your Business?

If you run a business—sole proprietor, LLC, S-Corp, or partnership—you can legally employ your children and pay them a fair market wage for real work.

Here’s what happens:

• You deduct their wages from your business income

• Your child pays little to no income tax (thanks to the standard deduction)

• That earned income becomes eligible for a Roth IRA contribution

This keeps money in the family while reducing your business’s tax bill.

IRS Guidelines for Hiring Your Children

The IRS allows parents to hire their children, but the key is doing it correctly.

 ✅ Your child must perform legitimate work

 ✅ The work must be age-appropriate and necessary

 ✅ You must pay a reasonable wage for the job 

✅ Payment must be documented (time logs, paychecks, W-2s or 1099s)

✅ You must file payroll taxes if required by your business structure

Example Jobs:

• Social media help

• Office filing and organizing

• Photography for products or blog content

• Cleaning and maintenance tasks

• Packaging and shipping

If your child is under 18 and you’re a sole proprietor or a partnership where both partners are parents, you’re exempt from FICA (Social Security and Medicare) taxes on their wages.

If your business is an S-Corp or C-Corp, payroll tax rules will still apply—but the strategy can still offer income-shifting and Roth IRA benefits.

Always consult with a tax professional to ensure your payroll is compliant—this is a powerful strategy, but only when done right.

How Roth IRAs for Kids Work

Roth IRAs are retirement accounts that use after-tax dollars, meaning:

• Contributions aren’t deductible

• But growth and withdrawals are 100% tax-free (if rules are followed)

To contribute to a Roth IRA, your child must have earned income. That’s where the payroll strategy comes in.

2025 Roth IRA Limits for Minors:

• Max contribution: $7,000 (or the amount of earned income, whichever is less)

• Contributions can be made by the child or the parent (as a gift)

Why Roth IRAs Are a Superpower for Kids

Kids have what most adults don’t: time. Even small contributions made early can snowball into massive wealth.

Example: Age 12: Child earns $6,000 and contributes it to a Roth IRA Money grows at 8% per year, untouched At age 60, that single contribution becomes over $180,000

Repeat that for a few years, and you're easily crossing seven figures. And remember: all of it is tax-free upon withdrawal in retirement.

Bonus: Your child can withdraw contributions (not earnings) at any time and can access funds early for qualified education expenses or a first-time home purchase.

The Tax Benefits for the Parent

This isn’t just a gift for your child—it’s a tax win for you too.

If you’re in a 32% tax bracket and you pay your child $15,000/year:

• You reduce your business’s taxable income by $15,000

• That saves you $4,800 in federal income tax alone

• Your child pays $0 in income tax if the wage is under the standard deduction ($15,000 for 2025)

Plus, if you’re a sole proprietor or eligible partnership, you’ll also avoid payroll taxes—saving roughly 15.3% on those wages.

That’s a tax-free wealth transfer and income shift in one move.

How to Set Up the Plan

1. Determine a real job your child can do

2. Set a reasonable hourly wage based on age and task

3. Track hours worked and maintain a simple log

4. Pay your child through payroll and issue a W-2 (or 1099 if applicable)

5. Open a custodial Roth IRA (Fidelity and Charles Schwab are good options)

6. Fund the Roth with part or all of their earned income

7. Repeat annually

You don’t have to max out the $7,000 contribution. Even $2,000–$3,000 consistently can yield incredible long-term results.

Common Mistakes to Avoid

• Overpaying your child for the task

• Not documenting the work performed

• Commingling personal and business accounts

• Skipping payroll filing (if your structure requires it)

• Missing contribution deadlines (April 15 of the following year)

The Bigger Picture: Generational Wealth Without Gimmicks

This strategy isn’t about hacks—it’s about education, stewardship, and structure. You’re teaching your child:

• How to earn money

• How to save and invest

• How compound growth works

• How to build wealth from a young age

And as a business owner or investor, you’re using the tax code exactly as it was designed—to reward families that take initiative, create opportunity, and plan ahead.

To tie this into an estate or trust strategy, check out our blog Estate Planning Strategies to Minimize Estate Tax: What High-Net-Worth Families Need to Know for next steps in preserving wealth across generations.

Conclusion: The Earlier You Start, the Greater the Outcome

It doesn’t take huge dollars. It takes consistency, documentation, and a long-term mindset.

Pay your child. Fund the Roth. Let the tax-free compounding begin.

This is the millionaire strategy that starts with lunch money—but ends with legacy.

This article is for educational purposes only and does not constitute financial or legal advice. Please consult a tax advisor to ensure this strategy fits your personal situation.