In this episode, Dr. Matt Motil talks about setting your children up for success in real estate investing!
This is a strategy Matt and his team have picked up and are implementing.
You can do this as a business owner and it saves you money, shelters taxes, and is a great way to put money away for your kids college as an alternative to a 529 fund.
I’m not a CPA, I’m not an accountant — make sure to seek financial advise from someone who is certified and/or licensed.
Let’s get started…
Set Your Kids Up For Success With REI
1. 529 Fund
Can be called 529-C.
Its a section of the IRS that is the tax code that relates to college funds.
The pro’s include:
- It’s a tax deferred vehicle for saving for college
- Anyone can contribute to it
- Grows on base of the market
The cons include:
- It has to be used for “educational expenses”
- Things that are involved in the college experience a 529-fund will not cover (AKA certain aspects of room and board, tuition, and books)
2. What Makes Sense?
Example: a teacher in Ohio…
The average teacher in Ohio makes between $35,000-$55,000 a year.
It is a usually a 5-year degree if you count student teaching.
Say you go to a college that is $20,000 per year, you rack up $100,000 in student loans.
What if you can’t find a job in that field? Is this sustainable?
3. As A Parent…
As a parent you need to think what if your child grows up and isn’t college material?
What if you child doesn’t want to go to college?
What if the price continues to rise for college tuition?
Say if your kid doesn’t want to go to college, and you decide to take money out of the 529-loan, you will be hit with taxes.
4. What Do You Do Instead?
If you set up your business in the right way you can hire your children as employees and pay them.
This allows you to take money out of the business, which lowers the tax basis.
The business pays what is left over.
Revenue – expenses = profit.
As an employee you pay taxes on the profit.
As a business owner you pay taxes on revenue.
An individual gets taxes taken out first.
A business gets taxes taken out at the end.
If you pay your own kids you don’t have to pay taxes on that money.
5. Does Your Child Need To File A Tax Return?
Every individual gets a standard deduction of $6,400.
As a business owner, if you are paying the individual less than $6,400 you don’t have to pay a tax return.
Say if you are in a 33% tax bracket with an 8% state tax and I’m in a 41% tax bracket combined…
I (the business owner) pay the child $6,000, I will save $2,600 just in taxes!
6. Retirement Accounts…
There are two retirement accounts: either a roth IRA or a traditional IRA.
A traditional IRA comes out pre-taxed – you don’t pay any taxes on the money, it grows tax free, but then you pay taxes later on when you pull the money out.
A roth IRA takes post tax money – so you put taxes on it today, it grows tax free, and then you can withdraw it tax free.
So the child takes the $6,000 and puts $5,500 in a roth IRA.
$5,500 is the most you can put an a roth IRA.
You can withdraw from a Roth IRA for qualified expenses because it was done in a post tax situation.
You don’t have to pay taxes when the money is taken out and because its being used for qualified expenses, you don’t have to pay penalties.
7. What’s Next?
Say you build up this IRA account and your child decides they don’t want to go to college.
You can still use the money with anything that is qualified without paying penalties on it.
And if you don’t want to take the money out, you’ve set your child up with a great retirement account!
Another perk is one of the “qualified things” is being a first time home buyer.
If you are a first time home buyer, you van withdraw from the roth IRA up to $10,000 for a downpayment towards the home.
8. What Does My Child Need To Do?
For your child to be able to do manual labor, they must be at least 7 years old.
A great way to let your child make money before 7 years old is advertising properties with your children holding the signs AKA “modeling.”
Be careful though – the money either has to go into that account and stay in that account OR has to be taken out of their account and go into an IRA account.
You cannot pay your children and then take the money out for family issues, yourself, or the business. It is a tax evasion (fraud).
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