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16 year old child earning YouTube income; investmentment advice

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  • 16 year old child earning YouTube income; investmentment advice

    Hello,

    My 16 year old son has had a successful year building his YouTube channel. His income this year will probably just north of $100K.

    He is looking for the most sensible and tax efficient way to invest some of his earnings long term (40+ year horizon).

    I recently opened a custodial Roth for him that he fully funded with a Vanguard Retirement 2065 fund.

    My understanding is that most of his income will be via a 1099 to him as an individual (he hasn't formed an LLC or any other entity).

    Does anyone know if he would be able to open a self-employed 401K as a minor and what might be involved in doing so?

    He also has an UTMA account but I'm not totally sure about the tax consequences of him contributing greater than the $15K annual gift to his own account.

    Any advice/suggestions would be appreciated.

    Thanks!

  • #2
    Congrats on a successful channel. How many hours a week does that take, and any changes in school-related activities, grades, etc. I would definitely monitor that aspect closely.

    Comment


    • #3
      As far as investments in accounts, just buying VTSAX is the easiest thing to do.

      Otherwise, depending on content they may benefit from reinvesting back into the channel to get for subscribers/followers or higher monetization. Keep in mind anything they buy for the channel is potentially a business expense. A portion of their room can be a business expense. A portion of home internet can be a business expense. Talk to your CPA about what's appropriate.

      Make sure they set aside money to pay quarterly taxes.

      School comes first at least through high school. Depending on what they want to do or interest, learning YouTube/social media and monetizing it is just as good as a traditional trade nowadays.

      Comment


      • #4
        I wonder if it is one of the teenagers playing videogames my kids like to watch for some reason

        Comment


        • #5
          Congrats to him on growing the business like that!

          I've learned a bit about that business model and my only suggestion is to not go to college, at least not yet. (Ironic saying that from a group of highly educated doctors).

          I would focus on investing into the YT channel, SEO, merch, affiliate marketing, other social channels.

          A 5+ year career like that growing a highly successful channel and he can be set for life.





          Comment


          • #6
            quick google search says there is no minimum age. However
            spiritrider
            Member
            spiritrider is usually the resident expert on these things.

            Any chance you can direct us to the channel? Or give us an insight into what it is? Does he use cross platforms like facebook live and twitch?

            Congrats on his early success!

            Comment


            • #7
              im not aware of any age related rules that would prohibit solo 401k. worth it to be cognizant of IRS business vs hobby rules. certain the venture could qualify as a business but be sure to operate in a businesslike manner, keep records etc. https://www.irs.gov/newsroom/earning...-or-a-business income amount alone doesn't make something a business so better to keep records etc now rather than have to create something later

              Comment


              • #8
                Originally posted by taqui View Post
                Hello,

                My 16 year old son has had a successful year building his YouTube channel. His income this year will probably just north of $100K.

                He is looking for the most sensible and tax efficient way to invest some of his earnings long term (40+ year horizon).

                I recently opened a custodial Roth for him that he fully funded with a Vanguard Retirement 2065 fund.

                My understanding is that most of his income will be via a 1099 to him as an individual (he hasn't formed an LLC or any other entity).

                Does anyone know if he would be able to open a self-employed 401K as a minor and what might be involved in doing so?

                He also has an UTMA account but I'm not totally sure about the tax consequences of him contributing greater than the $15K annual gift to his own account.

                Any advice/suggestions would be appreciated.

                Thanks!
                Usually there isn't age requirement for opening a solo 401k, but you do need to check with the service provider. I believe Vanguard's plan document does not have any age requirements, so you can open one right now for him. He can do a Roth 401k and possibly even MBR 401k if you use custom-designed plan document to put away as much as $61k, as well as do a Roth IRA. At the very least, you can contribute employee portion plus ~20% of his net income as profit sharing into a 'regular' individual 401k (~$40k total). MBR 401k is a lot more involved, and if his income grows, you might be fine doing some Roth and some pre-tax.
                Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                Comment


                • #9
                  I agree there is nothing in the tax code or IRS regulations restricting the minimum age for 401k participants. In fact I am aware of ERISA 401k plans that allow teenage participants. Any possible adoption restriction would be based on one-participant plan provider policies.

                  As noted, Vanguard does not allow any employee eligibility restrictions. However, I can think of a reason the OP's son would want such restrictions. He may continue to grow this business and hire employees while wanting to maintain the one-participant 401k.

                  I would recommend adopting the maximum restrictions:
                  • age 21
                  • one year service >= 1000 hours/year or three years of service >= 500 hours/year
                  All the mainstream one-participant 401k adoption agreements that support employee eligibility restrictions (E-Trade, Fidelity, Schwab and TD Ameritrade), have an election to exclude current employees on the date of the adoption agreement or amendment from the restrictions.

                  Since minors cannot own assets, this would have to be under UTMA or trust statutes. E-Trade, Schwab, TD Ameritrade and custom plans allow separate trusts and trustees. This trust is usually solely there to protect the participants assets from creditors. I have no idea if this trust can also be used to provide a custodial function for minors and optionally restrict distributions beyond the age of majority.

                  I would tell you to contact the mainstream one-participant 401k providers if this is possible with their plans. However, I would also caution you that CSRs from all of the mainstream providers have become increasingly unreliable sources of correct information. Personally. this is a unique enough situation that I would engage a professional third party administrator (TPA) for this one-participant 401k. That most definitely does not include non-TPA online 401k plan document resellers.

                  Comment


                  • #10
                    Originally posted by litovskyassetmanagement View Post

                    Usually there isn't age requirement for opening a solo 401k, but you do need to check with the service provider. I believe Vanguard's plan document does not have any age requirements, so you can open one right now for him. He can do a Roth 401k and possibly even MBR 401k if you use custom-designed plan document to put away as much as $61k, as well as do a Roth IRA. At the very least, you can contribute employee portion plus ~20% of his net income as profit sharing into a 'regular' individual 401k (~$40k total). MBR 401k is a lot more involved, and if his income grows, you might be fine doing some Roth and some pre-tax.
                    I'm also thinking solo Roth 401k with mega.backdoor

                    Comment


                    • #11
                      Originally posted by Lordosis View Post
                      I wonder if it is one of the teenagers playing videogames my kids like to watch for some reason
                      I'm glad it isn't just me.

                      OP, wow! I'm trying to teach my kid about investing with VTI (PAWZ this year) and spending with $25 amazon vouchers....

                      Comment


                      • #12
                        Originally posted by spiritrider View Post
                        I agree there is nothing in the tax code or IRS regulations restricting the minimum age for 401k participants. In fact I am aware of ERISA 401k plans that allow teenage participants. Any possible adoption restriction would be based on one-participant plan provider policies.

                        As noted, Vanguard does not allow any employee eligibility restrictions. However, I can think of a reason the OP's son would want such restrictions. He may continue to grow this business and hire employees while wanting to maintain the one-participant 401k.

                        I would recommend adopting the maximum restrictions:
                        • age 21
                        • one year service >= 1000 hours/year or three years of service >= 500 hours/year
                        All the mainstream one-participant 401k adoption agreements that support employee eligibility restrictions (E-Trade, Fidelity, Schwab and TD Ameritrade), have an election to exclude current employees on the date of the adoption agreement or amendment from the restrictions.

                        Since minors cannot own assets, this would have to be under UTMA or trust statutes. E-Trade, Schwab, TD Ameritrade and custom plans allow separate trusts and trustees. This trust is usually solely there to protect the participants assets from creditors. I have no idea if this trust can also be used to provide a custodial function for minors and optionally restrict distributions beyond the age of majority.

                        I would tell you to contact the mainstream one-participant 401k providers if this is possible with their plans. However, I would also caution you that CSRs from all of the mainstream providers have become increasingly unreliable sources of correct information. Personally. this is a unique enough situation that I would engage a professional third party administrator (TPA) for this one-participant 401k. That most definitely does not include non-TPA online 401k plan document resellers.
                        Yes, if employees are hired it is a completely different ballgame. So if the answer is yes, then I would recommend setting up a 'regular' 401k with a TPA and have them take care of the plan doc. If the answer is no, then things are as simple as doing a solo 401k at Vanguard. The issue for some solo plan owners might be that they don't plan to hire anyone now, but at some point decide to do so even if they didn't plan for it. This is a tricky issue for sure. So you don't necessarily want to start with a full blown plan (at a much higher cost) unless you know for sure you are hiring in the next year or two. One way to approach it is to only fund the 401k the following year by tax time. This way you fund it for the year prior, and if you do hire someone, you can easily set up a new plan with a custom plan document for the following year. As long as you don't participate in the plan yourself during the year, you can always start a new 'correct' plan and merge the two. Another approach is to use more customized docs from providers such as TD or Fidelity (if I remember correctly, at least one of them allows you to set eligibility requirements such as 1000 hours and 1 year of service), and this can be used as a 'transition' plan, so in the year when you hire employees they are not going to be eligible, and for the following year a full 401k with a TPA can be set up. I would recommend to use a provider that has some customization options as that would at least ensure that the employees are not eligible as soon as they are hired.
                        Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                        Comment


                        • #13
                          Originally posted by spiritrider View Post
                          However, I can think of a reason the OP's son would want such restrictions. He may continue to grow this business and hire employees while wanting to maintain the one-participant 401k.

                          I would recommend adopting the maximum restrictions:
                          • age 21
                          • one year service >= 1000 hours/year or three years of service >= 500 hours/year
                          All the mainstream one-participant 401k adoption agreements that support employee eligibility restrictions (E-Trade, Fidelity, Schwab and TD Ameritrade), have an election to exclude current employees on the date of the adoption agreement or amendment from the restrictions.

                          Since minors cannot own assets, this would have to be under UTMA or trust statutes. E-Trade, Schwab, TD Ameritrade and custom plans allow separate trusts and trustees. This trust is usually solely there to protect the participants assets from creditors. I have no idea if this trust can also be used to provide a custodial function for minors and optionally restrict distributions beyond the age of majority.

                          I would tell you to contact the mainstream one-participant 401k providers if this is possible with their plans. However, I would also caution you that CSRs from all of the mainstream providers have become increasingly unreliable sources of correct information. Personally. this is a unique enough situation that I would engage a professional third party administrator (TPA) for this one-participant 401k. That most definitely does not include non-TPA online 401k plan document resellers.
                          Thanks, I had not considered several of these points, particularly the restrictions and custodial/trust aspects. My son's YouTube channel is currently a one person operation (he's says he's not ready to relinquish editorial and artistic control!) with no near term plans of adding employees, but who knows...

                          BTW, do you happen to know any good resources for how to find an experienced/reputable professional third party administrator for this situation?

                          Comment


                          • #14
                            Originally posted by litovskyassetmanagement View Post

                            Usually there isn't age requirement for opening a solo 401k, but you do need to check with the service provider. I believe Vanguard's plan document does not have any age requirements, so you can open one right now for him. He can do a Roth 401k and possibly even MBR 401k if you use custom-designed plan document to put away as much as $61k, as well as do a Roth IRA. At the very least, you can contribute employee portion plus ~20% of his net income as profit sharing into a 'regular' individual 401k (~$40k total). MBR 401k is a lot more involved, and if his income grows, you might be fine doing some Roth and some pre-tax.
                            Wow, if he could do a $61K MBR401K with his current annual income in a sweet spot tax bracket, that would be amazing!

                            Comment


                            • #15
                              ************************ I'm jealous of your child.

                              Comment

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