For years, I’ve touted using IRAs to fund college savings for entrepreneurs’ children. It’s how I sent my daughter to DePaul basically for free.
Once your child is old enough to work at your company, give them a job answering phones, sweeping floors, or whatever it takes to generate a $7,500 W-2. At the end of the year, you generate the W-2 and pay the payroll taxes.
You then put that $7,500 every year into a Roth IRA. The money grows inside the Roth until it’s time for them to go to college.
How does this benefit you? Stay with me…
1 – There’s no 10% early withdrawal penalty for distributions from an IRA that go toward qualified college tuition, room, or board.
2. Since the money is in a Roth, you don’t have to pay regular income tax when the distributions are withdrawn.
3 – If the only thing you’re putting on a child’s 1040 is a W-2 for $7,500, there’s no federal income tax and only a very small tax from the State of Illinois.
In summary, what just happened?
You receive a deduction for the money you save for your kids’ college expenses. The only cost is the excess payroll taxes and a small tax at the State of Illinois level. And when you take the distributions out of a Rath, it doesn’t cost you a dime.
You’re basically sending your kid to college for free.
There was only one wrinkle in the plan, which was the fact that you had to wait until your kid was old enough to actually do something at your company for this to work. But, to a lesser degree, this is no longer true.
The new Trump Retirement Accounts for children are the new option. These are the accounts that can be established for your children the day they’re born, which the Treasury Department will initially fund with $1,000.
How does this solve part of the problem? I’m glad you asked.
1 – You don’t have to wait until your child is old enough to do something at your company. You can begin contributing up to $5,000 per year from the day they’re born.
2 – These accounts immediately become IRA accounts on your child’s 18th birthday. Consequently, qualified distributions for college expenses do not incur the 10% early withdrawal penalty.
There are two drawbacks.
1 – You would need to pay regular income tax on the distributions when the account is converted to a Regular IRA.
2 – You would not get a deduction from a W-2. Deposits to these accounts are generally after tax contributions.
Let me leave you with this…
Determining how to pay for a child’s education is one of the hardest challenges for most middle-class entrepreneurs. The house, the cars, the credit cards, and minuscule things like the payroll always seem to get in the way.
But every little bit helps. You should know that you’ll never get this advice from a financial planner.
Why? Because financial planners can’t legally receive commissions from IRAs.
This is one of the reasons they constantly tout 529 Plans. But there’s only one problem with 529s.
You can’t get a federal deduction for the money you deposit into them and state income tax savings are generally low. But if you put it into an IRA, you’ll get a deduction for the W-2.
The only true benefit to a 529 Plan is the deposit limit which is $19K for a single taxpayer and $38K for Married Filing Joint Taxpayers in 2026—certainly higher than the limit for an IRA.
However, because these new Retirement Accounts automatically convert to IRAs when the recipient turns 18, they introduce a new consideration for tax planning that everyone should evaluate.
If you’re having difficulties with your accounting and tax work, I’m waiting for you to contact me.
We’re all going to get through this. Let’s get through it together…
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, Accounting and Tax Work, Tax Planning, or Tax Representation, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
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