How My 8 Year Old Funds Her 2016 Roth IRA: Just in Time, Tax Break for Mom, Roth IRA for Kiddo

IRS is pretty strict about what you can pay your kids for. In a tax audit, paying an 8 year old 10k a year may seem hard to justify. But I think I have a case with my 8 year old Mini Wise Money (MWM).

 

Moneywise, it makes sense to pay Mini 10k, deduct her pay from Dr. Wise Money LLC business income, let MWM file and pay her own taxes, and then fund her own Roth IRA. Not only is MWM’s 10k AGI tax rate way lower than mine and that of DWM LLC, but also it is likely the lowest tax bracket MWM will ever enjoy going forward. Both Mini’s income and the tax rate are bound to increase as she gets older.

As many of you know, MWM is a gifted artist. Here’s a piece of oil-painting she completed in 9 hours, over 3 Sundays as a 4 year old. Her art teacher, taught a group of 15 5 to 13 year-old, MWM got in this group class because I convinced the teacher she was a very well behaved 4 year old.

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The red flower in a jar was Mini’s very first oil painting at 4 years old. The yellow flowers was her 2nd painting.

Her art teacher loved MWM so much that when I went on residency interview trail, she offered to take MWM off of her dad’s hand. She joked she would adopt MWM if she could.

Many people have offered to purchase MWM’s artwork, but parents, grandparents are not willing to part with MWM’s original art pieces. Hence MWM has only sold replica so far, but she has sold one original sculpture to my company DWM LLC at $300, and that’s with a generous discount (which Mini called mommy discount.)

MWM has generously displayed her artwork in galleries on drwisemoney.com. So for that, she’s getting compensated for $1500/year. Additionally, you noticed her pictures throughout many of my blog posts and even published on Physicians’ Money Digest. For her modeling work, she gets $1500/year flat fee.

We recently moved into our dream home (the second home I purchased in 2 years). We kept the first home in our family and got this dream home for MWM, my parents, and myself. As soon as the seller signed our purchase contract, MWM started planning parties and summer camps.

I was going to hire a professional party planner for MWM’s 9th birthday, but to my great surprise, Mini rose up to the occasion with quality-work that beats the professional I was going to hire. The tear-jerking party invitation letter (which really was an essay) and the party schedule (planned down the minute) certainly would have taken me more than 4 hours to produce (which is worth $388/hr x 4 to me.)

So MWM deservedly earned herself $1500 orchestrating her own 9th year old birthday party. See below for her party invitation letter, and the party schedule. I would definitely hire MWM for future company parties and events. Since at this party, we will be entertaining & feeding business associates and conducting business meetings for DWM LLC, we can definitely justify paying MWM from the DWM LLC. So it’s definitely wonderful that I am not paying personally, but my company DWM LLC is paying Mini for this company event/birthday party. When I pay Mini, it’s post-tax dollars. When DWM LLC pays Mini or me, it’s pre-tax money.

[Johanna CPA says: What DWM means by this is that, as an individual, there is no ordinary and necessary “business purpose” for taking a tax deduction for payments to MWM. However, she believes there is justification to deduct payments to MWM through DWM, LLC as ordinary and necessary business expenses.]

Back to MWM’s talent and hobby in art. She is designing and making our DWM LLC company uniform. The art supply and raw materials would be deducted from DMW LLC. Furthermore, MWM makes $500 for her creative design of the company T shirts. Then she gets $30/shirt purchased. I’m buying 40 shirts for business associates and volunteers. She made another $1200 here. We’re now at $6500.

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Min and best friend posting with their hand made unique tie-dye shirts.

Do you notice how many posts/articles I write are about MWM? She’s my think tank and creative juice. For every post she helps me generate, I started paying her $50 on 1/1/2016. Then I realized MWM was involved in so many posts that it was getting expensive, so we negotiated a fair deal after we discussed DWM LLC’s balance sheet.

Mini gets $2500 flat fee for the year of 2016 regardless of how many posts she help me generate. It’s already saving me money, as I have written more than 50 articles inspired by her this year, not counting all the other ones from prior year when MWM worked for future earnings. $9,000.

While I can’t exactly justify Mini’s equestrian lessons as DWM LLC company expenses, I could certainly justify her art lessons as furthering employee education. Since she directly benefits DWM LLC with her digital art gallery contribution on drwisemoney.com, time she spends on improving her art skills are compensated. MWM, voluntarily on average spends 15 hours per week watching art/DIY videos and creating new art pieces: 1-2 hour on each week day; 5-8 hours on the weekend. To be safe, we will count 10 hours per week and that’s 520 hours per year. So I pay her $2,000 for her 520 hours of work, which is just south of $4/hour. Not too shabby right?

So MWM will have made $11,000 in year 2016. She’s a pretty good little entrepreneur, right?

As her mommy, I’m more than happy to deduct her pay from my business,

watch her fund her Roth IRA at the tender age of 8 years old.

This one-time 5.5k she contributes to Roth IRA in 2016, assuming 8% annualized return, will double every 9 years.

She’d have (2 to the 5th power= 64x of 5.5k = $352,000) at retirement age of 62; tax free too.

If she contributes 5.5k for the next 10 years before she starts college.

The 10th 5.5k would have 4 doubling time, so still worth $171,000 at 62.

Now imagine adding up all the 10 years worth of 5.5k’s from 2016 to 2026.

I didn’t fund My Roth IRA until 30.

Mini’s certainly starting early and using time value of money as her ally, rather than a foe.

 

[Johanna CPA says: DWM is saving income taxes by deducting MWM’s pay from income at DWM’s higher marginal bracket and reporting in MWM’s lower tax bracket. As long as MWM has earned income, she will be able to use her standard deduction of $6,300 without reducing DWM’s Head of Household standard deduction of $9,300. Note that MWM will not be able to claim an exemption for herself since DWM will be claiming her. But that is not all: children working in a parent’s unincorporated business do not have to pay self-employment/FICA taxes if they are under age 18. That means that DWM is shaving FICA taxes from her tax bill which is a net gain. In addition, she does not have to pay federal unemployment taxes on MWM’s earnings until MWM is age 21, although she may have to pay state unemployment taxes, depending upon where they live. DWM’s strategy is also a good opportunity to teach MWM about budgeting by helping her work out a budget for MWM’s personal expenses and use her own earnings to buy extras while saving or investing what’s left after her Roth contribution and discretionary spending in a taxable account.]

 If you like this article, you might enjoy other DWM articles on Personal Finance, Investing, Retirement, Practice Management, & Lifestyle.

All articles by DWM are for informational purposes only and not intended as a substitute for professional advice. Please consult a professional accountant, financial adviser or lawyer, before making financial decisions.

6 $ Tips I Would Tell Dear Older Me

After I wrote about 6 $ Tips I Would Tell Dear Younger Me, I thought I should write to my future self too.  If it’s true that we learned everything we needed to learn in life as kindergartners, then I would thank myself for writing this when I’m older.

·        Remember enough.

Remember how content you are living on 50k and saving 24k? Remember all the things that make you happy had nothing to do with money once you’ve got your basic needs like food and shelter met?

·        Stay minimalist.

Remember how you love space more than clutter. You love people more than stuff. You taught Mini that the only things that matter in life are in kept in 2 places, in your brain and in your heart.

Don’t fill your life with belongings.

·        Feed someone hungry; don’t develop your own hunger.

Remember how you wanted to sponsor more kids in developing countries? Remember how you wanted to pay for Mariela (the child you started sponsoring in 2014) to fly and unite with her sponsor family?

Feed the truly hungry people. Don’t feed into the insatiable hungry monster within you.

·        Give yourself the permission to work less.

Remember how simple and comfortable life was when you made 50k? Give yourself a pay cut, work half time and make 125k. You should still feel like money is flowing out of every one of your orifices, you have too much money to know what to do with!

If you don’t feel that way, it’s time to cut back even more and living like a resident again, to remind you how wonderful life is when there’s not much money and possessions to worry about.

·        Work to learn, not to earn.

The epiphany you had at age 32 about time being the most precious resource any one has is still true. Don’t exchange your precious time for money. No matter how high the price is, it’s never really worth your time.

Invest your $ passively; invest your time actively. Never cease to learn and improve yourself, as a doctor, a mother, a partner, a human being. Most people on their death bed never wished they had worked more because most people associate work with earning money rather than learning new things.

I’m sure you won’t regret learning more, staying curious and adventurous into old age. Trust me one this, your younger self.

·        Don’t follow money. Follow your heart.

Who has your heart right now? If it’s something inanimate, without a soul, then you are way off the mark, dear older me! Read the bible and find that true treasures are store in heavens again.

Turn off all your electronics and stop checking your billion dollar portfolio, it’s an obsession. You’ve always had a bit of an obsessive personality, but you got to choose the right thing to obsess over.

How about all the big dreams you had when you were young? World health? Financial justice? Patient doctor relationship? Physician wellness? If you have yet accomplished your dreams of making the world a better place, it’s time to get to it!

Personal Finance, Investing, Retirement, Practice Management, & Lifestyle More articles like this on Physician’s Money Digest.

State of the Blog: Dear Readers

Hi There,

I’m Elva, apbka (also, previously, briefly, known as) Wise Money Shopper. Amanda, aka Dr. Wise Money, was my sister.

(more…)

6 $ Tips I Would Tell Dear Younger Me

I love the song Dear younger me by Mercy Me.

“Dear younger me

I cannot decide
Do I give some speech about how to get the most out of your life
Or do I go deep
And try to change
The choices that you’ll make cuz they’re choices that made me
Even though I love this crazy life
Sometimes I wish it was a smoother ride
Dear younger me, dear younger me.”

This morning when driving to work, this song came on the radio. I decided to write a letter to the dear younger me on some $ tips I wished I had known.

·        Sleep.

I slept no more than 4 hours/night since I was 17, for 15 years. It worked well in college when I was double majoring and had 7 odd jobs, worked well when I was single mother with 2 job in medical school. But I should have gotten help sooner and started sleeping more.

I recently increased my sleep by 50% from 4 to 6 hours and have become a much better person because of it.

·        Roth IRA when you got your first paycheck at 15.

I’ve been working since I was 10, but got my first pay check at 15. If I had been maxing out my Roth IRA since 15, I would have already been financially independent by now 🙂

This is why I’m maxing out my daughter Mini Wise Money’s Roth IRA this year, knowing that she will have more than 300k by the time she retires with just 1 time contribution of 5.5k in 2016. The power of time!

·        Cheap education.

_____ is like sewer; you get out what you put in. I did not need a 400k medical education when I could have rock the boards and matched where I want anyways spending ¼ of the money by attending an out of California medical school. I didn’t know better and applied to too few medical schools (California schools + 1 Ivy League med school.)

·        Eat well.

We are what we eat. Don’t skimp on food!

·        It’s OK to not be #1.

I was #1 in my medical school for 3 semesters. The fear of falling was worse than anything else. I could have smelled the roses so much more and enjoyed more time with my kid if I learned earlier that being #1 really means nothing.

·        Set yourself free: geographically.

In my opinion, California is a “sh**hole” compared to the beautiful Tucson, AZ where I live now. But I didn’t know any better, I was a fresh off boat with all my extended Chinese family in California, no one in the rest of the country. I should have known that each person’s paradise could be a different geographic location. I regret greatly the premium I paid to live in the crowded, congested, polluted cities in California where living was so stressful that little time was spent with the family I was close by.

Explore the country, be open to where you study, train and practice. I found my dream city Tucson, 14 years after I immigrated to the US. If I had been more open, I would have happened upon this great place sooner and saved 300k in medical education!

Personal Finance, Investing, Retirement, Practice Management, & Lifestyle More articles like this on Physician’s Money Digest.

Money Chased Me the Second I Stopped Chasing

I was great at chasing. Anything I chased, I got. Go-getter as they called it.

I picked my best friend(s),

I picked my career in medicine,

I picked specialty and residency programs (as they also picked me),

I picked and got what I wanted in life.

Remember the saying, “Be careful what you wish for.” That’s the story of my life.

I want something, I chase it, I get it, and then frequently I proceed to regret it.

I am total workaholic and sleepaphobic, I’d work like a dog on top of medical school and residency if there’s endless lucrative demand for my time. That’s why I decrease the demand for my time by increasing my tutoring/consulting price to right about $400/hour. Supply and demand. Even by putting high premium on my time, I still had it wrong. 
While it is quite easy to decrease the demand on my time by raising the price, it is not so easy to quit working for money all together. After all, that’s what I was taught. Go to school, get good grades, get a solid/secure job, pay bills, and save money.

Reading my hero Robert Kiyosaki’s book Rich Dad Poor Dad started a paradigm shift in my mind and my life. I learned that the path I’ve chosen professionally is a path of life-long learning at the extreme opportunity costs of becoming filthy rich. I have no doubt I would have already reached financial independence today, at age 32 if I dedicated the same amount of time, energy, and discipline to money rather than medicine.

So I stopped working for money.

I work to learn and to serve instead. That’s why I have not dropped out of residency or medicine all together. I am no longer trading my time in for money. I’m not waiting for future to enjoy the not-so-large-post-tax attending paycheck. I love and embrace today because I’m using my most precious assets, my time and my mind for more knowledge and for service to others.
As my focus switches from making money to pay bills and take care of family to finding ways to serve those around me better, either with medicine as a radiology resident or with money knowledge as a blogger and speaker, money started chasing after me.

I’ve made more money this year than I would have imagined from all the creative outlets I’ve developed from shear interest in others’ well-being, passion share to share, and my innate desire to reach out and collaborate. I didn’t make millions; I just made more than I’d ever thought, especially I didn’t give thought to how much I would make for what I did.

I work to serve and to learn.

As I continue to focus my limited energy and time (the most I can squeeze out is now 17 hours/day as I know sleep 6 hours/night and do half to 1 hour yoga/day) on service and knowledge. I feel at rest with a sense of conviction that my family and I are well taken care of with my simple passive investment principles. Doors of opportunities continue to open to me, and money just poor in without me trying.

 If you like this article, you might enjoy other DWM articles on Personal Finance, Investing, Retirement, Practice Management, & Lifestyle.

All articles by DWM are for informational purposes only and not intended as a substitute for professional advice. Please consult a professional accountant, financial adviser or lawyer, before making financial decisions.