The Power of Time Value of Money and Your Child’s Summer Job

Tax Planning for Your Children with the Help of  Time Value of Money 


Tax planning and investment advice are (or should be) closely tied together.  Looking at one while ignoring the other can greatly alter actual results from your expectations.  Although we at RPB are not an investment advisory firm, we as tax planners work hand-in-hand with many advisory firms.  The smart investor knows that the one thing that is never changing is time, and with proper planning, time can be an investor’s greatest asset instead of their worst nightmare.  Investing early can mean the difference between retiring when you want versus having to work those extra 10 years.  Nobody knows what the future will hold for our current Social Security System, so the next generations of future retirees must take on these challenges head on. Together with a good advisory firm and a tax planning team, these challenges can be met and conquered.

As summer begins, we all can recall the importance of our first job.  The FREEDOM, the RESPONSIBILITY, THE MONEY!  In today’s world, everyone is more and more in-tune to not only their current situation, but also what their future (and their child’s future) will hold, and to get the most out of it.  So how important is that summer job income for your child’s future?  Work experiences are great teachers and something that will help them when they do eventually enter career workforce.  How can the current summer job be important from a tax standpoint or from an investment standpoint?

The average student “new” employee will earn approximately $5,000 a year from their job.  With this earned income comes (yes no matter how old you are) taxes, but also, tax opportunities.  Under the current law, an single individual can earn up to $12,000 per year without paying any Federal income taxes.  Those wages, even though they are not subject to income tax, are eligible to be used to fund retirement accounts.  Including Tax-Free ROTH accounts.  What better way to fund a ROTH then with tax-free dollars instead of after-tax dollars!  Now let’s take an example a bit further. Say your son or daughter is willing to give up that cash and fund the ROTH each year throughout high school and assuming money doubles every 10 years where would they be at?  Well, after high school that ROTH would have just over $20,000 in it, but upon retirement that account could be approximately $640,000 and since it is a ROTH that could make it closer to $850,000 in after-tax dollars.  Using proper investment planning and utilizing the tax codes smartly can make huge changes in your future.

Smart tax advice is money well spent and failing to PROPERLY plan is just planning to fail.  Just ask our team at  RPB and let us see what we can do for you.  We are ALWAYS here to help.

Brad Voght is the tax partner at Reilly, Penner & Benton, LLP, a public accounting firm and trusted adviser specializing in business and personal tax matters as well as in not-for-profit work, school organizations as well as government and municipal agency work. The firm also provides ERISA audit services to publicly held entities throughout the country. A PCAOB registered firm, Reilly, Penner & Benton CPAs also known as RPB CPAs, has served closely held businesses and has provided tax preparation and advice, financial statement audits, reviews and compilations, employee benefit plan audits, bookkeeping services, business valuations, fraud prevention and consulting services since 1907.
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