How Practice Owners Can (Legally) Make Roth IRA Contributions for Their Children

If you’re a practice owner looking for creative ways to build long-term wealth for your kids, you may have come across a strategy surrounding Roth IRA contributions for children. On the surface, it sounds like a no-brainer: jumpstart your child’s retirement savings, take advantage of decades of tax-free growth and teach some financial literacy along the way. But like most tax-related strategies, it’s not that simple.

For one, the IRS doesn’t just let you funnel money into a Roth IRA for your child out of goodwill. Your child has to earn it, literally. The contribution must be based on earned income — not gifts, allowances or passive income. That’s where things get tricky, especially if your “employee” still takes naps and wears velcro shoes.

Because it’s easy to misuse, this strategy is highly scrutinized by the IRS. But if you’re committed to doing it right, it can work. Keep reading to learn who this strategy is best for, what’s legally required and how to set Roth IRA contributions for children without raising red flags.

Roth IRA contributions for children: Who this strategy is (and isn’t) for

Let’s get straight to the point. If your kid is still learning to talk and the only “job” they’re doing is smiling in a holiday ad for your practice, this strategy probably isn’t the right fit. Yes, some business owners use their young children in marketing materials, and in certain cases, it’s possible to pay them for modeling work. But if your spouse isn’t fully on board with using your baby for branding purposes — or if you can’t produce a formal contract and actual deliverables — this strategy may be more trouble than it’s worth.

However, if your child is a teenager or mature pre-teen who can genuinely help out in your office, this strategy becomes much more viable and far easier to justify if the IRS ever comes calling.

What qualifies as earned income?

The IRS is very clear. Earned income is money received for work actually performed. It’s not an allowance or gifts given to your children, nor is it interest or dividends from an investment account. This means your child must do real work and get paid a reasonable amount for that work.

So, if your 15-year-old helps answer phones or restocks supplies at your office (and you pay them a reasonable wage for those duties), that counts. But if you try to justify paying your three-year-old $20 per hour to do admin work, the IRS is going to have some questions.

What legitimate work looks like for Roth IRA contributions for children

To legally contribute to a Roth IRA on your child’s behalf, they must earn the money through real, age-appropriate work. This includes tasks that are necessary to the business, within your child’s capabilities and compensated at a reasonable market rate.

Here are some common examples of legitimate work a child might be paid for:

• Filing or scanning documents
• Organizing supplies or inventory
• Answering phones or greeting patients
• Cleaning the office or helping with event setup
• Managing basic social media posts or website content
• Taking photos or helping with marketing efforts

Each of these tasks can be appropriate depending on your child’s age and skillset, as long as you can document the work and compensation.

Roth IRA contributions for children: What not to do

Certain situations are almost guaranteed to raise eyebrows with the IRS, which could increase your risk of an audit and jeopardize the entire strategy. Avoid these potential audit magnets:

• Claiming your child was paid for shredding documents before they are even able to read.
• Paying wages for chores unrelated to your practice, such as making their bed or mowing the backyard at home.
• Setting an excessive wage for simple tasks (e.g. $100 per hour to answer the phone).

The more it looks like you’re just using your business to move money into a Roth, the more scrutiny you invite.

Bottom line: The job must be real. The pay must be fair. The documentation must be solid.

How practice owners can hire their children the right way

If you want this strategy to hold up under IRS scrutiny, you need to approach hiring your child like a real employment arrangement. Because in the eyes of the IRS, that’s exactly what you’re doing.

To keep things above board, treat your child like you would any other employee by:

1. Creating a real job description outlining their job duties.
2. Paying a reasonable wage based on the type of work and your child’s age and experience.
3. Tracking hours worked using timesheets or a digital log.
4. Actually issuing payment, ideally through direct deposit to a bank account in your child’s name.
5. Using a payroll service to handle withholdings, filings and year-end W-2s.

You may be tempted to issue a 1099 to keep it simple, but that’s risky. Most children working for their parents’ business will be considered employees, not independent contractors. Misclassifying them could lead to penalties, back taxes and additional scrutiny.

Setting up payroll and keeping documentation might feel like overkill, but it’s exactly how you protect yourself if Roth IRA contributions for your children ever come under review.

How Roth IRA contributions for children work

Once your child has legitimate earned income, you’re allowed to contribute to a Roth IRA on their behalf. For 2025, the maximum annual contribution is the lesser of their total earned income or $7,000. So, if your child earns $5,000 helping out at your practice, you can contribute up to $5,000 to a Roth IRA for that tax year — but not a penny more.

To do this, you’ll need to open a custodial Roth IRA, which is an account held in the child’s name but managed by you until they reach the age of majority (usually 18 or 21, depending on the state). Major investment platforms like Fidelity, Vanguard and Schwab all offer custodial Roth IRAs with online setups and low or no account minimums.

One misconception is that the Roth IRA must be funded with the child’s actual paycheck. In reality, the IRS only cares that the contribution amount is backed by earned income. So, while your child technically earns the income by working for your practice, you as the parent can use your own money to fund the Roth IRA contribution. Many families take this route by allowing the child to keep their paycheck for spending, while the parent contributes an equal amount to the Roth on their behalf. As long as the contribution doesn’t exceed the amount your child earned that year, this approach is perfectly legal.

Keep in mind that once your child reaches the age of majority in your state, the Roth IRA is fully theirs. You’ll no longer control how the funds are invested or when they’re withdrawn. That’s not necessarily a bad thing, but it’s something to plan for — especially when it comes to teaching your child financial responsibility and helping them avoid non-qualified withdrawals in the future.

Roth IRA contributions for children can be a tax savings bonus (depending on your business structure)

If your practice is taxed as a sole proprietorship or partnership (and your spouse is the only other partner), there’s a tax perk that’s worth noting. Wages paid to your children under age 18 are exempt from FICA taxes (including Social Security and Medicare). That’s a legitimate tax savings opportunity for both your business and your family.

However, if your practice is structured as an S corporation or C corporation, you don’t get that same exemption. Therefore, you’ll need to withhold and pay employment taxes just like you would for any other employee.

Proceed carefully and get professional help

Roth IRA contributions for children can be a powerful wealth-building tool, but only if it’s done correctly. Because this strategy is ripe for abuse, it’s an audit risk. That’s why documentation matters. From job descriptions and timesheets to payroll records and proof of payment, you need a solid paper trail to back up every dollar.

It’s also important to weigh whether it’s truly worth the hassle, particularly if your child is still too young to perform meaningful work. For many families, it’s simpler and safer to wait until their child is a teenager and can earn income independently through a part-time job or side hustle. At that point, you can simply match their earnings into a Roth IRA without the added complexity of putting them on your practice’s payroll.

If you’re serious about pursuing this strategy through your practice, we recommend getting expert guidance from the start. The rules are nuanced and one misstep could undo all your efforts, so be sure to talk with a CPA or financial planner about your specific situation.

At SLP Wealth, our team of financial planners can help structure Roth IRA contributions for children the right way so you can take advantage of the benefits without inviting unnecessary risk. Reach out today to start building a smarter, more intentional strategy for your family’s financial future.