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40 Comments

  1. I’ve loved the Junior IRA idea from the first moment I read about it and it’s a Shane that you’re right – things like that are incredibly unlikely to ever make it through the system.

    Really interesting concept in this post on how to work around that. It definitely rides on the edge of the gray zone since compensation for family members in a family business can be questioned if it is significantly different than what you’d pay a non-family member.

    That said, it’s a better solution than any other I’ve seen to get kids started. Can you imagine the creative energy that we could unleash if our kids had less worry about finances when they started their careers?

    • Mr. Groovy

      Agreed, Chris. It’s such a shame we have to “ride on the edge of the gray zone” just to introduce our kids to investing and retirement planning. Is it me, or does our federal government move extremely fast when it wants to enact a piece of legislation that will make us more dependent on it and its tender mercies? But anything that might make Americans more independent is never a priority. Meh. I think we got to start a grassroots movement called PGTOW (People Going Their Own Way). Our rallying cry could be “turn on self-reliance, tune out government, and flip off the Mandarin class.” And what better way the PGTOW movement going than to create back-door Junior IRAs for your kids. Thanks for stopping by, Chris. It’s always great hearing from you.

  2. Alicia

    In lieu of the Jr. Roth my family goes the stock route. Yes there are some potential tax implications for me, but my nephews are worth it. One of the criteria we give them for choosing stock is it must be dividend paying and then they must reinvest the dividend. Vanguard has been wonderful to assist us.

    • Mr. Groovy

      Total agree, Alicia. If we waited around for the government to make things easier, very little would get done. I love what you’re doing for your nephews. Helping them understand dividends and reinvesting at such a young age is really setting them up for success. Hail Vanguard! But more importantly, hail super-cool families with super cool aunts!!

  3. Love this concept. I’ve been teaching my little girl about money and investing before she could actually understand me.

    She’s now 7 and every year for Xmas I give her a homemade certificate that states how much money I invested in her Total US Stock Market Index Fund for the year. I do $100/mo and we’re currently on the 3rd year. Wish I had thought of doing a backdoor IRA like this though. Hers is in a taxable account.

    Here’s to hoping this post goes viral!

    • Mr. Groovy

      Thank you, MMM. The Junior IRA would really be a great arrow in our retirement quiver. We all say how we would like to see financial education taught in high school. Wouldn’t that education resonate a lot better if every kid had a retirement account? What a damn shame! But without the Junior IRA, parents just have to get creative. Starting a business and hiring their kids is one way. And what you’re doing in another way. True, your daughter’s account is taxable, but that liability is a small price to pay for the education she’s getting. You rock, my friend.

  4. Fascinating concept! I love the idea of getting kids’ retirement savings started early — what a great gift. The power of compound interest is undeniable.

    Any ideas for ways to create something like this for a young relative who is not your child?

    Also, thanks for writing “well-paying job” rather than the “good-paying jobs” phrase I’ve heard countless politicians using lately.

    • Mr. Groovy

      Hey, Matt. Very tough getting the Roth IRA going for someone who is not your child. That’s why my Junior IRA idea makes so much sense. First, it eliminates the job requirement for minors. Second, it allows anyone to contribute to a child’s Roth IRA. But because the Junior IRA makes so much sense, it will never see the light of day. Meh. You can see I took an extra does of cynicism today. Wish I had something more constructive to say. Thanks for stopping by, my friend.

  5. Lila

    If I ever have kids, I’m going to get the Dave Ramsey Junior program which is a kids money education program and it starts off at age 3.

    It teaches kids the basics of money, as your kids grow up, DR encourages them to teach them more complex money info.

    I also want to do a Junior IRA for my kids if I have them. I want them to be ahead than I am. 😛

    • Mr. Groovy

      Let’s see…loves Dave Ramsey’s money philosophy and sees the underlying wisdom of the Junior IRA? Sounds like the makings of an awesome mommy to me.

  6. I’ve told my kids as soon as they turn 12 they will start saving for college via a Roth IRA. They already are used to working for money. I’ll match all their contributions, and then they can pull 100% of those contributions for college (if they want, or for another reason like to start a business or buy a home) and keep all the growth in their as a kick start to their retirement. That way they will have a little nest egg to build on from day one. (The hardest part for most young 20 years old’s is just getting it set up and started.)

    Although I have a few rather ambitious kids, so I might need to put a cap on those matching contributions. =)
    My oldest just decided that instead of using his chore money for more toys he would buy one toy and then set the rest aside for some stocks. Oh geesh. He’s 9. Why am I even saving for retirement? My kids are going to be multi-millionaires! =)

    • Mr. Groovy

      Haha! I think until very recently in mankind’s history, kids were their parents’ retirement plan. So there’s nothing wrong with kicking it old school. I know you and Mr. M aren’t counting on it, but I think you have five future millionaires running around your house. Hail the Roth IRA! Hail 9-year-olds who want to invest in stocks!

  7. I am first of all impressed and very happy that this post was made. Even though I don’t get any benefits from it because I don’t have any kids, but I just love it when people are willing to take action to work and get the outcome they want. You can’t wait for the government to do everything, most of the time it’ll just take too long.

    And I also like how this is probably one of the most important lesson you can teach your kids, growing your income early and let compound interest do the work! The freedom stand is a great name, because this will kick-start their path to freedom!

    • Mr. Groovy

      “You can’t wait for the government to do everything, most of the time it’ll just take too long.”

      Thank you, T. That one sentence says it all. The future will not be kind to sitters and complainers. The future belongs to doers.

  8. Congress has been pretty lame as long as I can remember. Too many chefs, not enough cooks?

    I love the idea of getting the kiddos started off on the right foot. It ties in with my post recently on setting up trust funds to help ensure their success and happiness in life.

    As for a business idea, perhaps a blog? The kids could be in charge of taking pictures. $10 a pic, 3 pics per post, and me writing 33 posts per kid…seems do-able.

    It’ll be worth the headache of filling out a few forms…

    • Mr. Groovy

      “As for a business idea, perhaps a blog? The kids could be in charge of taking pictures. $10 a pic, 3 pics per post, and me writing 33 posts per kid…seems do-able.”

      Brilliant, TGS. The Freedom Stand is a fine idea. But, man, it would be a lot of work. A blog on the other hand, eliminates a lot of the nonsense and a lot of paperwork. Bravo, my friend.

  9. That’s interesting, and I didn’t know that you wouldn’t have to worry about the SS/Medicare tax for the kids.

    My kid’s been begging to do a YouTube channel. (She constantly watches videos) Maybe we need to launch one for her. (A business other than sales gets rid of a couple of steps…inventory and sales tax reporting.)

    • Mr. Groovy

      I love you! In a professional, totally above board way, of course. I don’t need a beatdown from Jon. But, yes, a JohnJaneDoe YouTube channel is a wonderful idea. Eliminating the inventory and sales tax stuff is a great way to reduce the aggravation of owning a business. And I’m sure Little Bit would be an awesome contributor. Thanks for stopping by, Emily. You made my day.

  10. Wow, this is such an interesting, creative, and comprehensive plan. Maybe we can take the time to implement all of these steps once we finally semi-retire. It would still give the kids quite a leg-up on retirement savings.

  11. That’s quite an elaborate process, Mr. G! It’s a real shame that it comes to that when a simple change could make it easy. On the other hand, making the kids work for it does teach an important lesson. It just shouldn’t be so hard on the parents.

    • Mr. Groovy

      Yeah, what a joke! I’m sure there are easier businesses that parents can start to get around the child-labor laws. But as you pointed out, if you’re up for the headache, it’s a great way to teach kids a very important lesson. Thanks for stopping by, my friend.

    • Mr. Groovy

      LOL! I’m sorry. I didn’t mean to stress anyone out. A 5-year-old with a Roth IRA is definitely a luxury. If your kids have Roths or 401(k)s by the time they’re 25, they’ll be fine. My point was twofold. First, you’d be better off if you didn’t wait for the government to solve your problems, and, second, the tools are there if you wanted to aggressively help your kids jump start retirement savings. But if it’s a choice between a Roth and a 529, go with the 529. Your kids will have the ability to save for their retirements themselves when they’re adults—especially if they have little student loan debt. Thanks for stopping by, Linda. Hope you guys didn’t get slammed by the snow.

  12. steve from arkansas

    I don’t think it is as bleak as you are making it out. I became a 401k millionaire easily and I’m not sure how anyone can miss doing that if they just contribute the max and leave it alone regardless of what the market does. Saying that the program doesn’t work because people do stupid things doesn’t mean the program is messed up, stupid people have never succeeded in life and this is just one more example of that. In fact you really can’t fix stupid most of the time. You can only shake your head and say “bless his heart”, which is southern for “that boy is dumb as a rock!”

    • Mr. Groovy

      “I became a 401k millionaire easily and I’m not sure how anyone can miss doing that if they just contribute the max and leave it alone regardless of what the market does.”

      Nailed it, Steve. For the culturally strong, things are hardly bleak. They have all the programs and tools they need to succeed in life. I should know. As soon as I got my act together and lost my fondness for stupidity, nothing could stop me. In ten years, Mrs. Groovy and I went from broke to financially independent. And we did it by taking full advantage of the Roth, the 401(k) and the 403(b). So I get what you’re saying, my friend. Things aren’t all bad. I just don’t know if this was the post to make a distinction between the culturally strong and the culturally weak—for which things are pretty bleak. Damn, this blogging stuff is hard! Thanks for stopping by, Steve. And thanks for injecting some needed optimism.

  13. “All Congress has to do is get rid of the IRA work requirement for minors.”

    Oh no, that’s much too difficult. So much easier to follow your (OMG) 15 step process to employ your kids in fake jobs.

    Crazy, right!? You have a right to be pissed off. We all do.

  14. This is extremely ingenious and well explained, but I’m in league with the comments above. That’s a LOT of hoops to jump through, and like Matt above, loop-holes around the IRS terrify me no matter how clever and awesome they are. I understand how important compound interest is to wealth-building, but I’m not sure I personally would go these extremes. But more power to anyone that goes for it!

    • Mr. Groovy

      You’re not wrong, Mrs. D. As Alan Thicke says when he’s hawking Optima Tax Relief, “Don’t mess with the IRS.” And besides, starting to fund a Roth IRA when your 16 or 18 isn’t the end of the world. You still have time and the awesome power of compound interest on your side.

  15. I think given all the hurdles your probably better off investing the money yourself and gifting it when they come of age. Especially if you can find a way to do it from an existing tax free vehicle.

    • This is what I was thinking, as well. Especially because I’m nervous about anything that seems “back-door” until it has been okayed by an IRS letter. I would be really interested to see what you would get in an IRS opinion letter as a response to this plan (with some of the “wink wink” aspects pulled out first).

      Of course, love the creativity and the thinking outside the box.

      • Mr. Groovy

        I’m torn here, Matt. My logical brain completely agrees with you. I would definitely consult a tax attorney or a CPA before I hired my child and set up a custodial Roth IRA. But then my lizard brain erupts. The IRS is going to jump all over some parents because they hired their child and the child’s contributing $1,000 to a Roth IRA? Really? With cities and employers flouting our immigration laws? With all the fraud going on in Medicaid, Medicare, and the DOD? There are certainly bigger fish to fry than parents creatively using our labor laws to help their children succeed financially. But we live in strange times. And the federal government just may deem something like Medicare fraud as less troublesome than more Americans achieving financial independence. Sad.

    • Mr. Groovy

      LOL! So true. It’s actually a ridiculous amount of hurdles to go through. Gifting the money certainly makes more sense. My only quibble with your reasoning is that a gift won’t drive home the fundamentals of personal finance. My ridiculous way of employing a minor is a hands on way to teach a child about saving, dollar cost averaging, index funds, and riding out market corrections.

  16. It’s a shame it’s all come to this. Politicians…

    We have been investing in our kids’ literacy about our online businesses. They quickly grasp things it took us a long time to comprehend. They have ideas that we never thought of.

    Impeccable logic and a terrific idea– another arrow in the quiver!

    • Mr. Groovy

      Thank you, Ian. I really appreciate your comment. Getting kids involved in the family business is a wonderful idea. Not only does it provide them with employment and retirement options, but it helps them master the fundamentals of finance. I love it.

  17. I guess the good news for me is that 2 of my 3 children have P/T jobs, so it makes it a bit easier to get started with a Roth. I think your synopsis of the current retirement landscape is frightening, so many people just don’t have a plan for themselves let along their kids. Then there’s that % who’s waiting on the Government to fix their problems. 🙂

    • Mr. Groovy

      Hey, Brian. Agreed. The government ain’t going to fix your problems. But, luckily, everything’s there if you want to help yourself. It is legal for a 5-year-old to have a Roth IRA. And it is legal for a 5-year-old to have a job. Admittedly, setting your kids up with a job so they can fund a Roth isn’t a walk in the park. But it can be one.