What if your 12-year-old could become a millionaire by age 50—and never pay a single dollar in taxes on any of it?
This isn’t some get-rich-quick scheme or shady loophole. It’s a completely legal strategy that wealthy families have been using for decades, and most parents have absolutely no idea it exists.
It’s called the Custodial Roth IRA for kids, and in this video, Toby Mathis from Infinity Investing breaks down exactly how it works, how to set it up, and how a few thousand dollars invested early can turn into millions of tax-free wealth.
The Magic of Starting Early: Real Numbers
Let me show you the power of compound interest with a simple example.
Let’s say your child works in your business from age 12 to 18, which is seven years total. During that time, they earn $5,000 per year doing legitimate work and invest all of it in a basic S&P 500 index fund. The total amount contributed over those seven years is $35,000.
If that money grows at the historical S&P 500 average of about 10% per year and your child simply leaves it alone, by age 60 that account would be worth approximately $2 million—completely tax-free.
If they continue making even small contributions as adults, it could easily exceed $3 million or more. That’s the power of time, compound interest, and starting young.
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What Is a Roth IRA and Why Is It So Powerful?
A Roth IRA is a retirement account where you contribute after-tax dollars. What makes it special is that there’s no tax on growth, which means your investments can grow for decades without Uncle Sam taking a cut. There’s also no tax on withdrawals, so when your child retires, they can withdraw millions tax-free. When you start young, decades of compounding means time does the heavy lifting.
Unlike a traditional IRA where you get a tax deduction now but pay taxes later, a Roth IRA flips the script. You pay taxes on the contributions, or in many cases you don’t because your child is below the standard deduction, and everything after that is tax-free forever.
Your Child Must Have Earned Income
Here’s the catch: your child needs actual earned income to contribute to a Roth IRA.
That means wages from a job, self-employment income, or payment for work done in your business. It does not mean allowance, gift money, or birthday cash from grandma. The income has to be from actual work. But here’s where it gets interesting for business owners.
Business Owners: This Is Your Secret Weapon
If you own a business, you can legally hire your own kids and create a powerful tax advantage.
Here’s how it works:
Step 1: Hire Your Child to Do Real Work
Your child can help with social media management, video editing (kids are often better at tech than adults), cleaning rental properties, product packaging, appearing in marketing photos or videos, or office support tasks.
The key word here is reasonable. You can’t pay your toddler $30,000 a year as a “consultant.” But paying your 12-year-old $5,000 a year to genuinely help with content creation, admin work, or property maintenance is completely legitimate.
Step 2: You Get a Tax Deduction
When you pay your child through your business, that’s a tax-deductible business expense for you.
Step 3: Your Child Pays Little to No Tax
If your child’s income is below the standard deduction, which is about $14,600 for 2024, they pay zero federal income tax on those earnings.
Step 4: Fund Their Roth IRA
Your child can then contribute that earned income to their Roth IRA, and it grows tax-free for life.
This is a triple win. You reduce your taxable business income, your child pays no federal income tax, and the money grows tax-free for decades.
How Much Can Your Child Contribute?
For 2025 and 2026, the Roth IRA contribution limit is $7,000 per year, which is indexed for inflation.
Your child can contribute up to $7,000 or their total earned income for the year, whichever is less. So if your child earns $5,000, they can contribute $5,000. If they earn $10,000, they can contribute $7,000, which is the maximum.
The Parent Match Strategy
Here’s a little-known trick: you can gift your child the cash to make the contribution.
As long as they earned the money, you can give them the funds to put into the Roth IRA. Think of it like a “parent match.” Your child earns $5,000 working in your business, you gift them $5,000 in cash, and they contribute it to their Roth IRA. It’s that simple.
How to Set Up a Custodial Roth IRA (Step-by-Step)
Setting this up is easier than you think.
Step 1: Open a Custodial Roth IRA
Choose a reputable brokerage like Fidelity, Charles Schwab, or Vanguard. All three offer custodial Roth IRAs. Your name stays on the account until your child turns 18, or 21 in some states, and then it transfers to them.
Step 2: Ensure Your Child Has Earned Income
This means documenting the work. If they’re an employee, run them through W-2 payroll. If they’re an independent contractor working for others, use a 1099. Even if there’s no withholding or taxes owed, document everything.
Step 3: Keep Excellent Records
The IRS may ask questions, so be prepared with job descriptions, timesheets or work logs, photos or videos of them doing the work, and payment records. This isn’t about being paranoid—it’s about being smart and protected.
How to Invest the Money (The Infinity Approach)
Once the Roth IRA is funded, it’s time to invest. Your child has decades of runway, so you want high-growth, low-cost investments.
Here’s what we recommend at Infinity Investing:
- S&P 500 Index Fund
Examples include SPY and VOO. These funds track the 500 largest U.S. companies and have historically returned about 10% annually over the long term.
- Total Market ETF
An example is VTI, which gives exposure to the entire U.S. stock market, including large, mid, and small-cap companies.
- Dividend Growth Stocks or REIT Funds (Advanced)
Once your child understands the basics, you can introduce dividend-paying stocks or Real Estate Investment Trusts (REITs).
The Golden Rule: Hold Long-Term
This is not about day trading. This is about owning productive assets, letting time do the heavy lifting, and remembering that it’s time in the market, not timing the market.
Teach your child that real investing means buying quality assets and letting them grow for decades. This philosophy is at the core of everything we teach at Infinity Investing.
This Isn’t Just About Money
Yes, the tax-free millions are incredible. But there’s something even more valuable happening here.
You’re teaching your child the value of earned income, how investing actually works, the power of patience and compound interest, and financial independence and responsibility. These lessons are priceless, and they’ll carry forward for life.
At Infinity Investing, we believe building wealth isn’t just about the numbers. It’s about creating a mindset and teaching principles that last for generations.
Common Questions
Can I do this if I don’t own a business?
Yes. As long as your child has earned income from any legitimate source like babysitting, lawn mowing, or a part-time job, they can contribute to a Roth IRA.
What if my child wants to use the money before retirement?
Roth IRAs have some flexibility. Your child can withdraw contributions, not earnings, at any time tax-free and penalty-free. But the real magic happens when they leave it alone and let it grow.
Do I need to hire a tax professional?
If you’re hiring your own kids through your business, it’s smart to work with a tax advisor to ensure everything is properly documented and structured.
The Bottom Line: Start Now
The single biggest advantage your child has is time.
Every year you wait is a year of compound growth lost forever.
If you own a business, have kids who can do legitimate work, and want to set them up for life while reducing your own taxes, this strategy is a no-brainer.
It’s legal. It’s powerful. And it’s one of the smartest ways to build generational wealth.