The Big Picture On Tax-Sheltered Real Estate Accounts:
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- Setting up a self-directed Roth IRA for your child with annual contributions as early as age 14 allows for tax-free growth and the power of compounding. Even with modest contributions, the account can grow significantly over time, potentially reaching millions by retirement age.
- By requiring your child to earn income to contribute to their Roth IRA, you’re instilling the value of hard work and financial discipline, which helps them learn about money management, investing, and the importance of long-term planning.
- Investing in real estate syndications within a self-directed Roth IRA enables tax-free growth on rental income and capital gains without the responsibilities of direct property ownership, like managing tenants or maintenance.
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Billionaire investing mogul Warren Buffett once quipped that he wanted to pass on to his children “enough money so that they would feel they could do anything, but not so much that they could do nothing.” Another gem from the Oracle of Omaha.
We all want to help our kids gain a solid footing in life, including financially, if we can. But, even if we could, simply handing them a check for $1 million on their 18th birthday doesn’t set them up for success. An unearned windfall like that in the hands of someone barely old enough to drive just begs for bad judgment, squandered money, and an entitlement mindset.
So, how can we help our kids establish a solid financial footing while teaching them important concepts about money and building wealth? Consider a strategy to set your child up with a wealth-generating engine they can learn from at an early age, which will gradually build significant wealth for them for the rest of their lives.
Using this strategy, by the time your child leaves home at age 18, you can help set them up to become multimillionaires with tax-free wealth at their disposal.
Step 1: Get Them an Income
Your child needs to have taxable income to qualify for a tax-sheltered investment account.
If your kid already works a part-time or seasonal job over the summer or during school breaks, great!
If not, or if they only earn a little spending money this way, you can help them. Hiring your kid part-time to work at your business can do the trick.
Just be sure to mind the laws around employing minors. Legally, you’ll have to treat your kid like any employee under 18. The Fair Labor Standards Act (FLSA) sets the minimum age for most non-agricultural work at 14 years old and limits the number of hours they can work. And you can’t assign your kid to hazardous tasks like operating heavy machinery—so no sending your teenager into the coal mines, even if you’re tempted sometimes.
You’re a real estate investor, right? Have your kid enter your receipts into your accounting software, conduct basic internet research, or even just shadow you while you do your day-to-day things.
Some states require minors to obtain work permits or employment certificates from their school or the state’s labor department before they can begin working. You must keep appropriate records of their hours, the tasks they perform, and their pay. The law requires you to pay them at least minimum wage, but how generously you compensate them for their time is up to you.
The key is to get their annual taxable income to the $6,500 threshold. That’s the maximum they can contribute to the tax-sheltered account they need for this endeavor.
Considerations When Employing Your Child
Consider these factors to ensure compliance with laws and tax regulations when employing your child.
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Age Restrictions |
Tax Implications |
Record-Keeping Requirements |
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Minimum age: 14 for most non-agricultural work |
Child’s income may be subject to “kiddie tax” |
Maintain detailed logs of hours worked |
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Hours limited for minors under 16 |
Parents may owe payroll taxes |
Document tasks performed and skills learned |
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Some states require work permits for minors |
Child may need to file a tax return |
Keep records of payments and any expenses |
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Being a landlord? Less fun.
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Step 2: Invest in a Real Estate Syndication Through a Self-Directed Roth IRA
Now for the hard(-ish) part. Your child will need a self-directed Roth IRA in their name. They need this account type specifically because normal Roth IRAs limit the types of investments you can make to common securities, and we have something a little fancier in mind.
Most major IRA providers don’t offer self-directed IRAs (SDIRAs), so you need to find a qualified custodian that offers the types of investments you want—in this case, real estate. Consider choosing an established custodian like Equity Trust or uDirect IRA that offers real estate investing capabilities. Set it up as a Roth account, not a traditional SDIRA.
After you help your child open an account, they can fund it with the money they’ve earned from their work, just like with any brokerage account.
Here’s where the magic happens.
You can work with your child to use the money inside their self-directed Roth IRA account to invest in real estate. Investing in a real estate syndication is a passive investment with high potential returns for your kid. They don’t have to be anybody’s landlord and can still profit from both rental income and capital appreciation. The income generated, and any capital gains realized get an extra boost thanks to the tax-sheltered nature of the account.
Because the account belongs to your child, they’ll need to instruct the custodian how they want to invest the funds. You can provide your kid with some coaching or talk to the custodian together.
Step 3: Reinvest for Compounding & Infinite Returns
With a Roth IRA, you pay taxes now but never pay them again on those funds, no matter how much they grow.
Read: tax-free compounding and withdrawals in retirement.
That works wonders for doubling your kid’s money tax-free in a few years if they earn the typical 15-30% returns on their real estate syndication investments. But they can do even better if they invest in infinite returns.
You earn infinite returns when you get your initial investment money back, but keep your ownership in the asset. The classic rental investing example is the BRRRR strategy, where you buy a fixer-upper, renovate it to create equity, rent it out, and refinance it to pull your property down payment back out. You keep the property, collect rental cash flow, and the property appreciates — but you don’t have any of your own money tied up in it.
The same concept exists in passive real estate syndications. The general partner renovates the property (usually an apartment complex), then refinances it once renovations are completed and the higher rents have stabilized. You get some or all of your investment capital back, but you keep your ownership interest in the property. You keep collecting rental income distributions and your slice of the property keeps appreciating.
Meanwhile, you can reinvest your original investment capital in other properties. In other words, you can recycle the same investment money in multiple deals.
Think of it as compounding on steroids.
Other Benefits of Using Real Estate as a Tax Shelter
In addition to what I’ve pointed out so far, below are some more benefits of using real estate investments as tax shelters.
Write-offs: From fixing a leaky faucet to overhauling an entire property, Uncle Sam lets you deduct a wide range of expenses. This means more money in your pocket and less in tax.
Depreciation: The IRS recognizes that buildings wear out over time. The depreciation can then be deducted – a tax break without spending an extra dime.
1031 Exchanges: Swap one investment property for another and defer capital gains taxes. It’s like upgrading your car without paying sales tax—but for real estate.
Passive Income: Leveraging tax benefits can make your rental income work harder for you. It’s about making each dollar count in the wealth-building trajectory.
Building Long-term Wealth: Combine property appreciation, steady rental income, and these tax perks, and you’ve got a recipe for financial success that would make Warren Buffett nod in approval.
Flexible Strategies: House flipping or long-term rentals – whatever your real estate path, there’s a tax advantage to match. Just move with the rules in your favor.
The Math to Millions
Setting this up for your child as early as possible can have a major, lifelong payoff for your progeny.
Imagine starting your child off at age 14, investing $6,500 annually for five years, giving them $32,500 in principal invested at age 18. Say you help them invest in a real estate syndication inside their self-directed Roth IRA, and they earn 15% annually.
If your child never contributes another penny to the account and it passively earns 15% in the background for them, they’ll have more than $1 million before they turn 40 and almost $4 million by the time they turn 48.
Investment Growth Projections When Contributed Until 18
Let’s look at the table that illustrates the potential growth of a self-directed Roth IRA investment starting at age 14, with annual contributions of $6,500 for five years and a 15% annual return on investment.
| Age | Principal Invested | Interest @15% Annual ROI | Total Account Value |
| 14 | $6,500 | $0 | $6500 |
| 15 | $13,000 | $1,045 | $14,045 |
| 16 | $19,500 | $3,303 | $22,803 |
| 17 | $26,000 | $6,968 | $32,968 |
| 18 | $32,500 | $12,268 | $44,768 |
| 19 | $32,500 | $19,465 | $51,965 |
| 20 | $32,500 | $27,818 | $60,318 |
| 21 | $32,500 | $37,515 | $70,015 |
| 22 | $32,500 | $48,770 | $81,270 |
| 23 | $32,500 | $61,834 | $94,334 |
| 24 | $32,500 | $76,999 | $109,499 |
| 25 | $32,500 | $94,601 | $127,101 |
| 26 | $32,500 | $115,034 | $147,534 |
| 27 | $32,500 | $138,750 | $171,250 |
| 28 | $32,500 | $166,279 | $198,779 |
| 29 | $32,500 | $198,234 | $230,734 |
| 30 | $32,500 | $235,326 | $267,826 |
| 31 | $32,500 | $278,380 | $310,880 |
| 32 | $32,500 | $328,355 | $360,855 |
| 33 | $32,500 | $386,364 | $418,864 |
| 34 | $32,500 | $453,699 | $486,199 |
| 35 | $32,500 | $531,857 | $564,357 |
| 36 | $32,500 | $622,580 | $655,080 |
| 37 | $32,500 | $727,887 | $760,387 |
| 38 | $32,500 | $850,123 | $882,623 |
| 39 | $32,500 | $992,009 | $1,024,509 |
| 40 | $32,500 | $1,156,703 | $1,189,203 |
| 41 | $32,500 | $1,347,873 | $1,380,373 |
| 42 | $32,500 | $1,569,774 | $1,602,274 |
| 43 | $32,500 | $1,827,347 | $1,859,847 |
| 44 | $32,500 | $2,126,326 | $2,158,826 |
| 45 | $32,500 | $2,473,367 | $2,505,867 |
| 46 | $32,500 | $2,876,196 | $2,908,696 |
| 47 | $32,500 | $3,343,783 | $3,376,283 |
| 48 | $32,500 | $3,886,535 | $3,919,035 |
Investment Growth Projections With Continuous Contribution
Now imagine if, instead, they continue to contribute the maximum $6,500 per year into the account after they turn 18! In that case they’ll accumulate their first million before they turn 35. And by age 48, they’ll end up with almost $7.5 million in their Roth IRA—all of it tax free in retirement.
| Age | Principal Invested | Interest @15% Annual ROI | Total Account Value |
| 14 | $6,500 | $0 | $6500 |
| 15 | $13,000 | $1,045 | $14,045 |
| 16 | $19,500 | $3,303 | $22,803 |
| 17 | $26,000 | $6,968 | $32,968 |
| 18 | $32,500 | $12,268 | $44,768 |
| 19 | $39,000 | $19,465 | $58,465 |
| 20 | $45,500 | $28,863 | $74,363 |
| 21 | $52,000 | $40,818 | $92,818 |
| 22 | $58,500 | $55,738 | $114,238 |
| 23 | $65,000 | $74,103 | $139,103 |
| 24 | $71,500 | $96,464 | $167,964 |
| 25 | $78,000 | $123,465 | $201,465 |
| 26 | $84,500 | $155,851 | $240,351 |
| 27 | $91,000 | $194,489 | $285,489 |
| 28 | $97,500 | $240,383 | $337,883 |
| 29 | $104,000 | $294,699 | $398,699 |
| 30 | $110,500 | $358,792 | $469,292 |
| 31 | $117,000 | $434,232 | $551,232 |
| 32 | $123,500 | $522,845 | $646,345 |
| 33 | $130,000 | $626,748 | $756,748 |
| 34 | $136,500 | $748,399 | $884,899 |
| 35 | $143,000 | $890,651 | $1,033,651 |
| 36 | $149,500 | $1,056,815 | $1,206,315 |
| 37 | $156,000 | $1,250,735 | $1,406,735 |
| 38 | $162,500 | $1,476,874 | $1,639,374 |
| 39 | $169,000 | $1,740,411 | $1,909,411 |
| 40 | $175,500 | $2,047,357 | $2,222,857 |
| 41 | $182,000 | $2,404,692 | $2,586,692 |
| 42 | $188,500 | $2,820,514 | $3,009,014 |
| 43 | $195,000 | $3,304,226 | $3,499,226 |
| 44 | $201,500 | $3,866,743 | $4,068,243 |
| 45 | $208,000 | $4,520,731 | $4,728,731 |
| 46 | $214,500 | $5,280,896 | $5,495,396 |
| 47 | $221,000 | $6,164,306 | $6,385,306 |
| 48 | $227,500 | $7,190,773 | $7,418,273 |
Tax Shelter Alternatives You May Consider
Of course, alternatives are beyond the horizon apart from real estate investments, and each option also has distinct risks and benefits.
Mutual Funds
Certain mutual funds are managed with tax efficiency in mind. Tax-managed funds aim to minimize taxable distributions through strategies like low turnover and tax-loss harvesting. Index funds, which passively track market indices, generally have lower turnover rates. Some mutual funds specialize in tax-free municipal bonds by combining the benefits of professional management with tax-advantaged income.
Foreign Investments
Investing in foreign markets can provide tax benefits through foreign tax credits, which help avoid double taxation on international investments.
Some countries offer tax incentives to attract foreign capital to reduce your overall tax burden. Offshore accounts in certain jurisdictions may offer tax deferral opportunities, but these are subject to complex regulations and reporting requirements.
Retirement Accounts
Retirement accounts are investment vehicles designed to help individuals save for retirement while offering tax advantages. Traditional IRAs and 401(k)s allow you to contribute pre-tax dollars, reducing your current taxable income.
The money grows tax-deferred until withdrawal in retirement, at which point it’s taxed as ordinary income. Roth IRAs and Roth 401(k)s, on the other hand, are funded with after-tax dollars but offer tax-free growth and withdrawals in retirement.
Oil and Energy
Investments in oil, gas, and energy sectors can bring tax advantages. The depletion allowance permits owners of oil and gas wells to deduct a portion of their gross income to account for the declining value of their reserves.
Renewable energy investments may qualify for tax credits. Intangible drilling costs, such as wages and fuel for drilling operations, can often be deducted in the first year.
Municipal Bonds
These are debt securities issued by local governments. The interest income from municipal bonds is typically exempt from federal taxes and may also be exempt from state and local taxes for residents of the issuing state. This tax-free status allows these bonds to offer lower yields while still providing competitive after-tax returns, especially for high-income investors.
Final Thoughts On Tax-Sheltered Real Estate Accounts
Getting your children invested in private equity real estate syndications in a tax-sheltered account offers them a huge leg up without many downsides of large, lump-sum gifts. An 18-year-old who has a self-directed Roth IRA with less than $50,000 in it won’t feel like they can goof off in life and never have to work. At the same time, that seed you’re planting today will set them up for a very comfortable retirement even if they never invest another penny.
Far from spoiling them, helping your kids earn an income and set up a long-term investment like this teaches many valuable lessons. It also gives your kids an early jump on their careers by giving them some work experience before they finish high school. They might even discover a type of work they love!
They’ll learn from first-hand experience how to invest, and their early returns should help get them excited about investing for the long term. Plus, helping them set up a tax-optimized account and showing them the power of compounding will give them the knowledge that will pay them dividends (literally!) throughout their entire lives.
What better way to set your kids up for success before leaving home?♦
How do you plan on helping your kids become millionaire real estate investors?
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A children’s book about real estate will be an amazing hit!
Love it Sparkle!
I’m actively educating and motivating my kids to read, attend seminars, and learn from their parents. We’ll see if any of it sticks…
Haha, keep us posted Harper!
Like the concept. Going to brainstorm some ideas on implementation
Glad to hear it Bryant!
Fascinating strategy
I think so too Seri!
As a parent, I wholeheartedly agree with Warren Buffett’s perspective on providing our children with enough resources for empowerment without creating dependency. It’s crucial to their growth and independence while instilling essential life skills and financial responsibility.
Amen TML!
Achieving taxable income for kids and reaching the $6,500 threshold is tough but doable. Let’s help them become resourceful and succeed.
I certainly want my own daughter growing up to be resourceful!
I love the concept. I worry about my kids growing up entitled though. In some ways the financial tactics are easier than the parenting nuances.
Agreed Mabin!
I find this fascinating! It’s like giving them (kids) a valuable product with the potential for significant returns. Just remember that there are risks involved, and educating our children about financial responsibility is essential.
Absolutely. Teaching risk management is one of the lessons that real estate investing can offer kids.