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Help Me Spend $1100!

Kid with moneyWe had a pretty good year at work in 2012, which is great. When you have a business, you want to make money. However, that also means a bigger tax bill.  Because I’m not a fan of handing over money, I’m always on the lookout for legal ways to minimize taxes. I’d already maxed out my employer retirement plan. I put quite a bit into my HSA. It seems like I’ve already done several of the great suggestions Krantcents recently recommended. What else could I do?

My accountant, who has an LL.M. in tax law,  suggested that we hire my daughter. Legally, you can hire kids when they are 7 years old to do basic tasks like filing or cleaning up. My daughter was only five. He told me to set up a photo shoot and use her pictures for advertising purposes. I could then pay her as a model. He said to think of child actors and models in Hollywood and how much they were paid for services. It was perfectly legal, and he said he would go to bat on that any day. Good enough for me.

We did hire a photographer and had a photo session. My business paid our daughter $5000 (she is pretty cute). Since it was earned income, we set up a Roth IRA and put the money there. She can use the contributions for things like college, or it can stay, gathering interest, until she is 59.5 or older. You can do the math on to see that it will be a good chunk of change, and something I would never have though of without the accountant’s suggestion. Thanks, Bruce.

We did withhold taxes. I guess we didn’t have to on that amount, but I’ve never hired a five year old. This was new ground. As a result, our daughter filed a tax return, and got a refund!  The accountant filed it as a courtesy, so I really didn’t think about it until we got two checks in the mail; $224 from the state, and $884 from the fed, made out to our six year old. It was pretty fun to have her sign her name to endorse them.

Well, now we have an extra $1108 that I was not expecting. It can’t be put into the Roth, so we’ve narrowed it down to three options. Since this is technically money meant for our daughter, I want it to be used for her benefit. If we had consumer debt, I’d have no problem using it toward that, as this would benefit the whole family. Luckily, we already crossed that bridge.

Our options:

  1. Contribute the amount to her 529 plan. The money would grow tax free, but if she didn’t go to college, we’d get a penalty to use it for something else. Like Shannon at the Heavy Purse said this week, college isn’t for everyone.

  1. Invest the money in dividend stocks. Interest would be taxed, but she could use it for school or something else we deem worthwhile in the future. If she drops out of school to play tambourine in a folk band, we could keep the money for ourselves.

  1. Put it in the travel fund for a family trip. This would not earn much interest, but we’ve determined that family travel is a valued use of our money. This could fund a small trip or a portion of a bigger one.

I need your help. If you found $1100 to be used in the best interest of a six year old, which option would you choose? Or would you just go and blow it all on a swing set or one of those electric kiddie Hummers?

If you choose the stock option, what is your favorite one right now?

Image: Freedigitalphotos.net/Dominici

About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.

53 comments

  1. sending you my paypal address as we speak! :). Reinvesting in a business soon not to be yours doesn’t seem like the best option, so I would go with the stock market or a rainy fund for your rental property.

  2. I would go with the trip. In my case as least, I tend to under-prioritize family activities. Building those family ties and memories are always good.

  3. I’m a big believer in the power of travel. Especially as a family. Creating memories for your children that will last a lifetime are more valuable than a college fund she may not use. Congrats on following some mega awesome advice by your accountant. He’s a keeper!

  4. Family trip for sure. Your daughter will remember it the rest of her life 🙂

    • I think she would. She actually still remembers some stuff we did when she was 3. I hope her little head can hold all the stuff we plan to do down the road.

  5. I am completely in favor of the trip! I think that you’ve got the other stuff taken care of, so there’s serious need to enjoy yourselves – besides, it goes toward that work/life balance, right? 🙂

  6. I have been putting $10 a week away for our son since he was born and I leave it in a high interest bank account and rollover certain amounts into term deposits to gain that little bit extra interest for him.

    Mind you with interest rates so low in the US that might not be a good option for you.

  7. We plan on hiring our daughter next year when we can. Just another beauty of running your own business. 🙂 The logical side of me says go with #2 as it could grow and does not HAVE to be spent for college purposes so you get more flexibility. But, the traveler in me says go with #3, which is the way I think I’d go.

    • It does kind of seem OK to spend it for a trip, since we invested already in the Roth.

      • Family trip! I was never able to afford many of those and I feel my sons missed out on memories. I have so many memories of driving/camping trips with my family when I was young and now that my sons are in university there is no chance to get away and still no money to do it.

        • We never went many places either as a kid. I’m not sure if my parents couldn’t afford it or my dad just wouldn’t take off work, but I wish we had. I think that’s why it’s so important that we do that while our daughter is young.

  8. Cool stuff, Kim! I would absolutely put it into dividend paying stocks. We recently opened a stock account and are going to put $100 for each of the kids in, and $100 for Rick and I, and are going to start a dividend stock “buying club” for our family.

    • That’s a cool idea. I could even let her have some input on stocks like Walt Disney or McDonalds. Might as well own some of the company.

  9. Wow, I had no idea you could hire a 6 year old! It makes sense though. I guess I’d put the money in an index fund, but don’t let her have it until she’s 18. It will have grown a crazy amount over 12 years, and she can either use it for college, or whatever she needs. Way to be smart parents!

  10. Have you asked your daughter what she wants? It is technically hers…

    I’d probably set some aside for her to choose and use the rest to invest for college or a general taxable account that will become hers at a certain age.

  11. I would vote for the dividend stocks. They’re the gift that keeps on giving.

  12. I remember working for my parents when I was 7 years old! Unfortunately, I was not paid, but they later paid for college. So I think everything works out. Thanks for mentioning me, I really appreciate it.

  13. This is a great spot to be in. I’d probably put $1,000 in a 529 plan that can be invested in mutual funds and then I’d let her choose what she wants with the other $100. Maybe give it to her in all small bills and allow her to spend it when she wants? It could help teach her more about the value of money.

    • It is a great spot to be in. That’s a good idea with the small bills. Kids would rather have 100 singles than a Benjamin.

  14. Maybe split the money and use some of it for the trip and some for her college fund. That way she can see how her “hard work” has paid off and you get rewarded (with the trip) but you also have to be responsible and put money away. Or maybe she is too young to understand that? Anyway, just my thought! 🙂

  15. Very interesting! I say travel just because I love to travel 🙂

  16. Disneyland trip, for sure! It’s something she’ll always remember and at 6, with all the princesses and everything, it’ll be the best trip ever! 🙂

  17. Since you already set aside money for her (what a great windfall that will be for her some day) and this is icing on the cake, so to speak, I say use it on a great vacation. Having a saving/frugal mindset is important but money is also a gift. And this is a gift in my mind, so enjoy it because you’ve worked hard to be in a place where you don’t need to use it to pay down debt, etc. You have a genius accountant and I may have to hire my girls too. 🙂 Thanks for the mention, too – I really appreciate it!!

    • Hiring your kids is a great way to displace some income if you need to. It was really easy to set up a Roth with Vanguard as well, and it shows up online with my other accounts. You don’t have to have a separate password, etc.

  18. TRIP TRIP TRIP. Somewhere really fun for the kiddo.

  19. I am between investing it and using it for travel. Maybe #2 and #3 could be an option. Invest half and use the other half for a good chunk of travel.

  20. I would go with a travel fund for the family. You could take a nice little trip and case less about minor expenses because it was money you weren’t expecting. Take them somewhere to stay a night or two on the weekend and go and see some sites you have overlooked before.

    • We could take a long weekend trip this summer and maybe go to a baseball game or amusement park. Good suggestion.

  21. I would go for the 529 plan all the way! That is assuming that the 529 that you have has good investment options available.

    • There aren’t a ton. I have it in an aggressive growth portfolio right now, but will likely shift it as she gets older.

  22. Very interesting idea to “employ” her! I think we may have tried this with my cousin, which worked out well.

  23. Wow, who would have thought? Your accountant is smart! And, I’m sure your business will benefit, too. I vote to take the vacation.

    • That seems to be a popular suggestion. I think we will likely do a hybrid version and put half in travel and half in investments.

  24. I’m not sure what the rules are like for education savings in the States, but that’s where I’d put it if you have space. (I also don’t know what the rewards and penalties look like!) Otherwise, I would invest it, so that it can’t be touched until she’s older (like 18 older, not 16).

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