How To Fund Your Child's Roth IRA And Other Tax Optimizations With The FI Tax Guy
Episode 136
Episode Guide
Episode Timestamps
ChooseFI Episode Show Notes
Episode Title: Optimizing Tax Strategies for Financial Independence with Sean Mulaney
Episode Summary: Exploring the intricate relationship between financial independence and tax strategies, Sean Mulaney shares valuable insights on optimizing tax benefits and the journey towards personal finance mastery. He discusses the importance of establishing residency for educational savings, effectively funding a child’s Roth IRA through earned income, and the implications of recent tax reforms on charitable giving. This episode provides practical techniques for leveraging financial decisions to secure long-term wealth and independence.
Key Topics Discussed:
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** Podcast Intro:
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Introduction of Guest: Sean Mulaney, an accountant embedded in the FI community, discusses the tax strategies beneficial for achieving financial independence.
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Personal Finance Journey: Sean shares his background in accounting and how it has influenced his path towards FI.
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Key Quote: "The FI concept helps you build a financial house with strategic tools and tactics."
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Understanding Tax Strategies:
- Key Quote: “Recognizing that our worst case scenarios aren't as daunting as they appear.”
- Sean explains that accountants often cater to corporations and how his journey towards personal finance differs from typical accounting paths.
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Funding Roth IRAs for Children:
- Key Quote: "Employing your children can create valuable tax deductions while saving for their future."
- Discusses how parents can fund a child’s Roth IRA by employing them, creating both tax benefits and future savings.
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Charitable Giving Strategies:
- Key Quote: "Tax reform has shifted strategies for maximizing charitable giving through timing contributions."
- Strategies on how to donate effectively, including the use of donor-advised funds.
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The Hot Seat: Sean answers rapid-fire questions about personal finance, sharing insights into his biggest financial mistakes and valuable life hacks.
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** Podcast Extro:
Actionable Takeaways:
- Consider employing your children to take advantage of tax deductions and fund their Roth IRAs.
- Investigate donor-advised funds for optimizing charitable contributions by bunching several years’ worth of contributions into one tax year.
- Research residency requirements early if planning for educational savings that require in-state tuition.
- Understand implications of recent tax reforms on your ability to itemize deductions.
- Utilize discussed strategies to enhance tax efficiency in your financial planning.
FAQs:
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How can I fund my child's Roth IRA?
- Employ your child and pay them a wage that qualifies as earned income. This allows contributions to their Roth IRA up to the amount they earned.
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What is the advantage of a donor-advised fund?
- It allows you to bunch contributions together and maximize itemized deductions.
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What types of expenses can be deducted for employing a child?
- Wages paid for work they perform in the business can be deducted as legitimate business expenses.
Speaker Highlights:
- Brad Barrett: Co-host engaging with guests to explore financial independence.
- Jonathan Mendonsa: Co-host dedicated to helping listeners achieve financial independence.
- Sean Mulaney: Accountant specializing in tax strategies for the FI community.
Related Resources:
- Sean Mulaney’s website: malaneyfinancial.com
- Personal finance blogs and articles by notable authors in the FI community.
Discussion Questions:
- What steps can you take to optimize your own family's tax situation?
- How does financial independence impact your views on tax strategies?
- What are the long-term benefits of funding a child's Roth IRA?
- How can donor-advised funds enhance charitable contributions?
- What are some common misconceptions about tax deductions for businesses?
Email Campaign Segment: Did you know that employing your children can provide significant tax advantages? Find out how in our latest episode with Sean Mulaney!
Skeleton Email:
Subject: Unlock Financial Benefits with Insights from Our Latest Episode
Dear [Name],
In our latest episode of ChooseFI, we had the pleasure of speaking with Sean Mulaney, a tax expert deeply embedded in the financial independence community. [Brief mention of actionable insights discussed].
Listen in and start applying these strategies today!
Best regards,
[Your Name]
Podcast Description: Join ChooseFI as we delve into the insights of tax strategies for financial independence with Sean Mulaney. Learn how to optimize your financial decisions, maximize tax benefits for your family, and navigate the complexities of charitable giving in today's financial landscape.
Unlocking Financial Independence Through Smart Tax Strategies
Establishing a solid financial future is vital to achieving financial independence (FI). With the right strategies, you can optimize your tax benefits, enhance your wealth, and secure long-term financial stability. This guide expands on key concepts discussed in the ChooseFI podcast episode with tax expert Sean Mulaney, and aims to provide practical insights into financial planning and tax optimization.
The Foundation of Financial Independence
To build a strong financial house, you must first understand the tools at your disposal. This concept of financial independence integrates various financial strategies to create a robust and effective approach to managing your money.
Understand the Tools for FI
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Roth IRA: One of the most powerful tools for long-term retirement savings, Roth IRAs allow for tax-free growth and withdrawals in retirement. Any earnings in your Roth IRA are not subject to income taxes, which makes it a critical component of your financial strategy.
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Tax Benefits: Familiarize yourself with the current tax code and how it can benefit you. Considerations like tax deductions, credits, and the structure of your income can significantly impact your financial landscape.
Fund Your Child's Roth IRA
A lesser-known strategy for maximizing your family’s financial benefits involves funding your child's Roth IRA. This can be accomplished by employing your child in your business, allowing you to take advantage of both tax deductions and the opportunity for tax-free growth in their retirement accounts.
How It Works
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Earned Income: To contribute to a Roth IRA, your child must have earned income. This can come from jobs performed within your own business, where they can be compensated fairly for work like office cleaning, administrative tasks, or even landscaping.
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Tax Deduction for You: By paying your child a wage, you can deduct that amount as a business expense, decreasing your taxable income.
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Tax-Free Growth: The money put into your child's Roth IRA will grow tax-free until retirement, creating a valuable investment for their future.
Utilizing Donor-Advised Funds for Charitable Giving
Charitable giving is not only about the act of donating; it’s also about doing so in an optimized and tax-efficient manner. Donor-advised funds (DAFs) have become a popular choice for many individuals looking to maximize their charitable contributions while minimizing tax liabilities.
Maximizing Charitable Contributions
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Bunch Contributions: By front-loading several years of charitable contributions into one tax year, you can exceed your itemized deduction threshold, allowing for greater tax deductions that year. With DAFs, you can donate assets while dictating how funds are distributed over time.
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Appreciated Stock: Donating appreciated stocks directly to charity or to a DAF allows you to avoid capital gains taxes on appreciated assets. This makes your charitable donations more impactful and financially savvy.
Navigating Recent Tax Reforms
Recent changes in tax laws significantly altered the landscape for taxpayers. Understanding these reforms will empower you to make smarter financial choices.
Implications of Tax Reform
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Higher Standard Deductions: The rise in the standard deduction means fewer taxpayers are itemizing their deductions. This makes it important to strategize your charitable giving methods to ensure you still derive tax benefits from your donations.
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Employment Tax Benefits: If you employ your children in a qualifying capacity, the tax benefits can extend both to you and your child, reducing overall family tax burdens.
Take Action: Your Path to Financial Independence
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Research Residency Requirements: If you are considering educational savings benefits, early research into residency requirements can save you money in tuition and fees.
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Employ Your Children: Look into how employing your kids can provide financial benefits and savings for their future while simultaneously lowering your taxable income.
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Explore Donor-Advised Funds: Investigate whether establishing a DAF aligns with your philanthropic goals while maximizing tax advantages.
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Stay Informed on Tax Changes: Regularly review the tax code and related reforms to ensure you are leveraging all available opportunities to optimize your tax efficiency and financial planning.
Final Thoughts on Financial Independence
Achieving financial independence is an ongoing journey that requires patience, discipline, and strategic planning. By employing smart tax strategies and maximizing your available resources, such as Roth IRAs and donor-advised funds, you can create a solid foundation for a financially stable future.
As you embark on your financial independence journey, remember that taking proactive steps today can lead to substantial benefits tomorrow. Consider the insights shared, and put them into practice as you work toward not just financial independence, but also a wealth-building mindset that will serve you for years to come.
A dive into taxes with Sean Mullaney, the FI Tax Guy.
[elementor-template id="143609"]Sean's Career In Accounting
When Sean started out as a rookie accountant, he had a plan to become a partner in an accounting firm in his home state. However, he learned that it is difficult to move up the ranks in large firms so he started looking for other options.
As he looked around, he saw many exciting opportunities in Washington D.C. Although the jobs looked amazing, he knew that he would have to put in his time at the IRS first. After some research, he found that the way to find a job at the IRS was to go to law school.
Law School
After deciding that he wanted to go to law school, he started looking for affordable options. George Mason in Virginia seemed like a good option but Sean knew that he would need in-state tuition to make it an affordable choice.
Immediately Sean started applying for jobs in Virginia to gain residency in the state. After working in Virginia for a few years, he was able to obtain his law degree in an affordable way. Through in-state tuition and a scholarship, he was able to keep his student loan debt manageable.
George Mason University had a very interesting scholarship program. They way they did it was it was $5,000 for the first year... and then $3,000 for the second and third years each if you stayed in the top 15% of the class. So the scholarship was not automatic... but it gave you more incentive to study hard and do well on your tests.
Related: Demystify College Scholarship With Brian Eufinger
Landing The Job
After finishing law school, Sean was hired on at the IRS. Sean knew that putting in his time at the IRS would open the doors he wanted in Washington D.C. Eventually, he was able to land a job at a big 4 national office based on his experience with the IRS.
Career Paths In Accounting
As an accountant, you have a wide range of opportunities. If you are considering becoming an accountant, then you should realize that the starting pay is in the mid-five figures. At a smaller firm, the top end of the pay scale maxes out sooner. At a large firm, you could make your way to a six-figure salary.
There are so many different paths you can take whether that is on your own, in a small firm, big firm, or in industry.
Typically, a large city means a bigger salary. The real potential for earning comes in your promotions at an accounting firm.
Another approach to career growth as an accountant is to put in your time at a big firm. After a few years, you could make the leap to corporate America at a higher salary.
Accounting truly is the language of business.
Yet another approach is choosing to start your own firm.
Sean's Personal Finance Journey
Although accountants deal with finances every day, according to Sean and Brad, that does not always translate into good personal finance choices. Most accountants work with large corporations which do not require a background in personal finance.
Due to that, Sean's personal finance journey started separately from his professional career as an accountant. After finding ChooseFI and learning about the building blocks of FI, he has been attempting to build those bricks into a solid financial life.
A Fully Funded Lifestyle Change
After many years in a traditional accounting career path, Sean decided to make a change. Over the years he had an increasing interest in personal finance. That interest turned into a desire to help individual clients with their financial and tax planning. In June 2018, Sean started Mullaney Financial And Tax which provides financial planning, tax planning, and tax preparation.
Sean was able to do this by saving up living expenses and funds to start a new business before making the leap. However, the change did not happen overnight.
Back in 2016, Sean started a training program in financial planning at night. He aggressively saved for two years before deciding to make this fully funded lifestyle change.
It's been sort of a slow shift. With the money I'd saved up and some great support from my wife, Catherine, I've been able to execute this fully funded lifestyle change.
Since June 2018, he has had a busy professional and personal life. Between getting married, moving across the country, starting a blog, and getting all of the business licenses up and running the last year has been a busy one. Luckily for Sean, the career switch is not too farfetched, so he feels comfortable with the choice.
Related: Forget Retiring Early--Go For A Fully Funded Lifestyle Change Instead
Building A Business From Scratch
Before quitting his job, Sean was unable to build up a client base due to his work obligations. Since June 2018, Sean has been hustling to build a business from the ground up. He has built a blog, been on podcasts, talked to people in his local area, and tried several other approaches to get his message out there.
There is no one approach that will work in every industry, in every case.
If you are looking for ways to build your own business here are some suggestions from Sean:
- Establish a blog with content that people can read
- Take advantage of every speaking opportunity you get
- Go to conferences
- Find a mastermind group
- Build relationships
- Look through LinkedIn for people that might need your assistance
- Find places where people in your field are meeting up
- Find the places where your clients are meeting up
- Visit your local Chamber of Commerce
- Be active in your church
- Be open about your career
- Take action and get the word out there
First Client
Once you land your first client, realize that it is okay to be nervous. You might not have all of the answers for your client, but you can do the best job you can. Always give the best advice and service that you can give.
There are going to be some bumps in the road. On the entrepreneurial track, you have to be comfortable with being uncomfortable.
Do your best and help your client.
Related: When A Life-Sucking Job Forces You To Rethink Everything
FI Tax-Efficient Strategies
Now that Sean is focusing on a balanced career of helping people with their personal finance goals and tax help, he has done an extraordinary amount of research into tax-efficient strategies for our community. Of course, we cannot cover everything about FI and taxes today. However, these strategies will serve as a starting point for more conversation. Sean has graciously offered to provide more tax information for our community in the future.
As a reminder, Sean is not giving tax, legal, or accounting advice. You should consult your own advisor for assistance.
How To Fund A Roth IRA For Your Child
A Roth IRA can be an incredible vehicle for investment growth. If you have the ability to fund a Roth IRA for your child, that could be an amazing opportunity to help secure their future. The catch is that Roth IRA contributions must be based on earned income of the contributor. That means your child has to earn an income that is reported to the IRS in order to fund a Roth IRA.
If you have a side hustle or full-time business that operates as a sole proprietorship, then you may be able to easily fund a Roth IRA for your child while creating a tax deduction for yourself.
For example, if you run a small business, then you could hire your child to do a small job around the office. Whether that is cleaning up on the weekend or helping you make copies, you can pay them a reasonable wage with money that will be a tax deduction for you.
Presumably, your child would earn less than $6,000 for the year which will eliminate the need for your child to pay income taxes based on the standard deductible and they will also be able to avoid payroll taxes based on the rules. At the end of the year, you can add up their earning to a total "earned income." That earned income is the amount that you will be able to contribute to your child's Roth IRA.
Although the physical money put into the Roth IRA does not have to be the money earned in their paychecks, it cannot exceed the amount of money they earned in their paychecks.
Related: How To Open A Roth IRA For Kids And Teach Your Kids About FI
It is important to note that this structure will not work well for an S corporation. It is best for your own business that is a sole proprietorship on your schedule C. Also, every state has different rules so you want to double check that your child can legally work for you. In some states, you may need to get a special certificate in order for your child to work for you.
If your child earns money from other gigs like mowing the lawn or babysitting, then they will need to file a tax return on a schedule C or SE. By filing the tax return, they will have to pay payroll taxes but it would allow them to fund a Roth IRA with their earned income.
Related: How Kids Can Make Money And Get A Financial Jump Start
If you are interested in helping your child fund a Roth IRA from your side hustle, then the best place to start is by filling out a W4. At the end of the year, you will also need to fill out a W2. When the child files their tax return, then you need to attach the W2 to the front of the form. You can find these forms on the IRS website and they are not difficult to fill out.
Taking action on this tax strategy could be the most powerful vehicle for your child's future.
Optimize Your Charitable Contributions
If you donate to charity, then you might as well do it in the most tax efficient way possible. In recent years, the new tax laws that raised the standard deductible have changed the landscape for tax itemization. Instead of itemizing their deductions like charitable contributions, many people just take the standard deductible. However, there is a more optimized way to make your charitable contributions.
You have the option to open a donor-advised fund. Within the donor-advised fund, you can make two to four years of charitable contributions in a single tax year. With these contributions, you may be able to pull yourself over the threshold of the standard deductible in favor of itemizing your tax deductions.
Set up a donor-advised fund, move some assets into the donor-advised fund this year. And then have the donor-advised fund for the next two, three, four years write a check to your church every week or every month. What that does is it takes two, three, four years worth of donations to your church and moves them onto this year's tax return.
If you were going to make these contributions anyways, then this is a very tax efficient strategy. However, it is only worth pursuing this strategy if you are relatively close to the standard deduction based on your other deductions for the year.
Another way to donate to your charity of choice efficiently is by donating stocks or securities directly to the charity or to your donor-advised fund. With this donation, you will be able to claim a tax deduction for the fair market value of those shares and you will avoid paying the capital gains tax.
If you want to learn more about the specifics behind tax deductions and the benefits of itemization check out Sean's post here.
How To Connect
If you want to connect with Sean, then check out his blog, FI Tax Guy, or his firm's website Mullaney Financial And Tax. You can also follow him on Twitter @seanmoneyandtax
The Hot Seat
Favorite blog: J.L. Collins Stock Series
Favorite article: Cosmo Kramer and Financial Independence
Favorite life hack: Fasting every other Friday by skipping breakfast and lunch. It offers spiritual, health, and financial benefits.
Biggest financial mistake: Chasing yields.
The advice you would give your younger self: Stay close to the Catholic Church. It is so much more than just going to church on Sunday, prioritize your faith and your God.
Bonus! What purchase have you made over the past 12 months that has brought the most value to your life? HP laserjet printer and scanner
Related Episodes And Articles
- Fully Funded Lifestyle Change
- Gift Tax 101: The Tax Consequences Of Giving Large Sums Of Money
- How To Hire Your Children And Reap The Tax Benefits
New to FI? Be sure to check out Episode 100: Welcome To The FI Community!
