The Republicans in Congress had eight years to come up with an Obamacare replacement. And what did their fertile minds, brimming with immense critical thinking skills come up with? Obamacare 2.0.
Really guys? For eight years you’ve been telling us how awful Obamacare is. Why, it’s not only a colossal failure when it comes to reducing the cost of healthcare services and, consequently, healthcare insurance, it’s the biggest threat to freedom and prosperity since the Nazis conquered Europe and the Imperial Japanese decimated Pearl Harbor. And your answer to this alleged abomination is more of the same with sheepishly reconfigured subsidies and mandates? Pathetic.
The Back Door Junior IRA
The point of this post is not to rail against the Republican Party. Nor is it to rail against our obviously flawed healthcare system. No, the point of this post is to stress that our politicians, regardless of party, aren’t very good at changing course. For whatever reason, whether they’re bereft of ideas or they’re beholden to change-fearing special interests, our politicians have a strong preference for the status quo. The “system,” therefore, ain’t gonna change anytime soon.
Okay, since the system isn’t changing anytime soon, it’s your job to make due with the existing framework or infrastructure. To show you what I mean, let’s consider retirement.
Here is a brief synopsis of the current retirement landscape.
- Pensions are becoming a thing of the past.
- Well-paying manufacturing jobs have been severely pruned by offshoring, automation, and robotics.
- Wages and salaries for all but the top tier employees have stagnated.
- The cost of housing, college, and healthcare is making it impossible for many Americans to save.
- Defined contribution plans—we’re looking at you Mr. 401(k) and Mr. 403(b)—are proving to be a poor substitute for defined benefit plans. This is so because defined contribution plans are voluntary, are often saddled with high administration fees and poor investment options, and are more suited to those with a fair degree of financial sophistication (i.e., not the typical employee).
- Individual investors are bad at picking stocks and have a knack for buying high and selling low.
- Actively managed mutual funds have notoriously high fees. A millennial investing in such funds could lose 25% of her portfolio’s value to fees over the course of her investing life.
- Those who manage retirement plans or provide retirement planning advice are under no obligation to be fiduciaries (i.e., do what’s best for the client/investor).
- Finally, our best known retirement vehicles—the traditional IRA, the Roth IRA, the 401(k), and the 403(b)—are all job-centric. In order to contribute to any of these accounts, you must have gainful employment.
Now let’s suppose you have young children, and you want them to start saving for retirement as soon as possible. After all, you know how hard it’s been for you and your generation to save for retirement. Why allow your children to suffer the same fate? If you can get them in the game before they hit the first grade, you’ll really be setting them up for success. Investing $20 a month for 63 years at 10% would produce a million dollar portfolio.
But as I have made abundantly clear, very little if anything is going to change on the retirement front. The headwinds that make saving for retirement so hard aren’t going away. Nor is our sorry retirement framework likely to change. Heck, Congress will have its hands full just trying to bound retirement planners to the fiduciary rule. So you can forget about my idea of removing the IRA work requirement and making it easier for children to save for retirement. There isn’t a snowball’s chance in hell that the Junior IRA will ever be enacted by Congress.
So what do you do? Do you give up? Do you just wait until your children are gainfully employed at 16 or older before you make them open a Roth IRA?
Yes, our politicians are useless. But, happily, we don’t need them to do anything to help us on this front. Providing you’re up to the challenge, you actually have all the tools you need right now to get your children saving for retirement long before they turn 16. In other words, there’s nothing stopping you from opening and funding a back door Junior IRA for each of your children. Let me explain.
How to Create a Back Door Junior IRA for Your Children
Opening Roth IRAs for your children is easy. Just log onto your favorite brokerage firm’s website and set up a custodial Roth IRA for each of them. The hard part is getting money into those accounts. Your children must have jobs. Here, then, is how you’ll skirt those pesky child-labor laws.
- Start a business, a sole proprietorship to be precise, and register it with your city or county. In my county, Union, North Carolina, registering a sole proprietorship costs $26. My suggestion is to keep it simple and start a “freedom stand” (i.e., a glorified lemonade stand). But if that doesn’t appeal to you, start whatever business you’re comfortable with. Just make sure it has tasks your children can handle.
- Get an Employer Identification Number from the IRS. You can apply online for free.
- Register your business with your state so you can collect and remit sales and withholding taxes. In North Carolina, this registration is free.
- Hire your children. There are no minimum age requirements for children working in a parent’s business. Here’s the relevant section of the Fair Labor Standards Act (FLSA).
The [FLSA] exempts from its minimum age requirements the employment by a parent of his own child, or by a person standing in place of a parent of a child in his custody, except in occupations to which the 18-year age minimum applies and in manufacturing and mining occupations.
So as long as your sole proprietorship isn’t a manufacturing facility or a mining operation (i.e., anything dangerous), you won’t have the feds hounding you over your hiring practices.
- For each “employee,” fill out and submit the income tax withholding forms for the federal government and your particular state government. The federal form is W-4, and the form for my state, North Carolina, is NC-4.
- Since you’re only going to be paying your children $1,000 each for their services annually, you won’t need to withhold any income taxes from their “pay.” Also, you won’t need to deduct employment taxes. Children working for a parent in a sole proprietorship don’t have to pay Social Security and Medicare taxes.
- Open your freedom stand in your driveway and pay your kids $10/hour to manage and operate the “store.” Start off by stocking your freedom store with cans of soda. Later you can add other simple items (toilet paper, soap, candy, coffee, etc.) that family and friends—wink, wink—can “purchase.” I’m sure family and friends won’t mind a steep markup.
- Each of your children should work 100 hours a year. This amounts to slightly less than 2 hours a week. Much of their time will be devoted to selling soda to the neighborhood kids. But they can also help out with tracking inventory, updating time sheets, and keeping the books.
- Once each of your children has earned $1,000, shut down your freedom stand for the year.
- Make sure each of your children deposits $1,000 into his or her respective Roth IRA.
- Remit sales taxes to your state every quarter.
- Issue W-2 forms to your employees by the appropriate deadline.
- Submit federal and state income tax returns for each of your children.
- Include any “profit” from your business on your federal and state income tax returns.
- Repeat steps 7-14 every year.
Whew! That’s a lot of work for you parents out there. And I’m sure there’s a bunch of stuff I’m missing. Running a business, even a pseudo business, is going to be a lot of work. But if you want your kids to have a kick-ass retirement—and can stomach the aggravation—the back door Junior IRA is a must. Check out the links below for a little motivation.
Suppose you did all of the above and put your children on the company payroll as soon as they turned five. Suppose also that each of your children contributed $1,000 a year to his or her custodial Roth IRA. How much money would your children have in their Roths when they turned 18? Assuming a 10% annual return, each would have nearly $27K. If your children continued to fund their Roths once they took complete ownership of them, and each contributed $100 a month until retirement, each would have $4.5 million in his or her Roth at age 67. If each contributed $200 a month, each would have $6.2 million. If each contributed $500 a month, each would have $10.8 million.
Anyone remotely familiar with the core principles of personal finance knows the power of compound interest. The earlier you start investing the better. An 18-year-old has a much easier path to a million dollar portfolio than a 30-year-old. Likewise, a 5-year-old has a much easier path to a million dollar portfolio than an 18-year-old. The math is irrefutable. So if you have children under 16, especially young children, you owe it to them to start a business and set them up with back door Junior IRAs.
Okay, groovy freedomists, that’s all I got. Normally, when I finish a post, I’m elated. But finishing this one pissed me off. Why? Because giving our kids a leg up on retirement and financial independence shouldn’t be as hard as it currently is. All Congress has to do is get rid of the IRA work requirement for minors. This way, family, friends, businesses, churches, and charities can contribute to a kid’s Roth. But it’s never going to happen. We’re stuck with the current system. And the only ones likely to make the current system work for their kids are the rich and the financially sophisticated. Thank you Congress. I’m so glad we have you fighting for the little guy.