Using a Roth IRA for Children in a Family Business

Small business owners may find it challenging to find ways to provide additional benefits to their children who work for the company. One often overlooked choice is including a Roth individual retirement account (IRA) as part of their compensation, a strategy that may offer the potential to benefit both the children and the business.

Small businesses play a significant role in labor markets. They employ 61.7 million Americans, 46.4 percent of all private-sector employees. Over the period from 1995 to the present, small businesses have been responsible for generating 17.3 million net new jobs, which accounts for an impressive 62.7 percent of all jobs created since 1995.¹

The Basics of a Roth IRA

A Roth IRA is a tax-advantaged investment account that allows individuals to contribute after-tax income. Unlike in traditional IRAs, contributions to a Roth IRA are not tax deductible, as their advantage lies in the tax-free growth potential and tax-free withdrawals in retirement, subject to applicable rules.

Roth IRA contributions are phased out for taxpayers with adjusted gross incomes (AGIs) above a certain amount. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals can also be taken under certain other circumstances, such as the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.

Utilizing a Roth IRA for Compensation

To contribute to a Roth IRA, the working family member must have earned income. This requirement creates an opportunity for small business owners to include their children as employees and compensate them accordingly. In this scenario, the fact that the child is likely in a very low tax bracket is an advantage, meaning that a smaller percentage is paid up front.

Building a Foundation for the Future

Not everyone knows that Roth IRA funds can be used for various purposes before the age of 59½, such as purchasing a first home, covering educational expenses, and even paying medical costs, subject to IRS rules. Consistent contributions from a young age may accumulate into a substantial account. Imagine that a child starts working at 8 and continues until 16, and the small business contributes to a Roth IRA. Upon reaching adulthood, the child may have a sizable sum saved for milestones such as purchasing a house or funding a college education.

Seeding Financial Success

Although the initial contributions may seem small, the long-term benefits of including a Roth IRA in a child’s compensation package may be significant. It not only may establish a solid financial foundation but also may instill valuable lessons about saving, investing, and preparing for the future. By involving a financial professional, parents may seek support that their children receive guidance as they transition into adulthood.

Preparing for the Next Generation

Managing money for the next generation has gained considerable attention in recent years. As businesses and families prepare their financial legacies, strategies such as including a Roth IRA in compensation packages are becoming increasingly popular. By working with a financial professional, families may navigate the complexities of wealth management. If you own a small business, including a Roth IRA in your children’s compensation package may be a game-changer. With the potential for tax-free growth and a range of permitted uses, this strategy may provide numerous benefits and potentially greater financial success.
1. Advocacy.sba.gov, March 7, 2023

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2026 FMG Suite.

Investment advisory services offered through Tenet Wealth Partners, LLC, a registered investment advisor with the U.S. Securities and Exchange Commission. This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor. This information is not an offer or a solicitation to buy or sell securities. The information contained may have been compiled from third-party sources and is believed to be reliable. Hypothetical illustrations and outcomes will vary based on individual circumstances.

The information provided in this communication was sourced by Tenet Wealth Partners through public information and public channels and is in no way proprietary to Tenet Wealth Partners, nor is the information provided Tenet Wealth Partner’s position, recommendation or investment advice.

This material is provided for informational/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Investments are subject to risk, including but not limited to market and interest rate fluctuations.

Any performance data represents past performance which is no guarantee of future results. Prices/yields/figures mentioned herein are as of the date noted unless indicated otherwise. All figures subject to market fluctuation and change. Additional information available upon request.