Roth IRAs have gained significant traction since their introduction in 1997 as part of the Taxpayer Relief Act of that year. Their namesake was Sen. William Roth, a five-term senator from Delaware, who was the last Republican senator from that bastion of liberalism to be elected since Roth’s final term began in 1994.

Roth IRAs differ in several major aspects from their traditional IRA brethren: first, contributions to a Roth are not tax-deductible in the year in which contributions are made. Secondly, if a person has an adjusted gross income in excess of $183,000 for 2012 ($188,000 for 2013), no Roth contributions were allowable. Beyond those two negatives, Roth IRAs have many positives: no required minimum distributions; no income taxes are levied when monies are withdrawn; and, the growth in one’s Roth account will never be taxed. Finally, individuals can continue to make Roth contributions from earned income beyond age 70½.

Actually, if a person has neither ever made any traditional IRA contributions, nor rolled over any qualified plan assets to a traditional IRA, there is a perfectly legal way to circumvent the income limitations for contributing to a Roth. First, open up a traditional IRA account, but make a non-deductible IRA contribution to it of up to $5,000 (if you have not yet filed your federal income tax return, due to an extension, you may do so now and have it “count” as a 2012 contribution). As soon as your account has been opened and your money deposited, “convert” your traditional IRA to a Roth, and the only taxes levied will be on any gains in the account that were earned in the time since your contribution was allocated to your account.

The second planning tip is for those small business owners who operate either as sole proprietors or as a husband-wife partnership. In a word, put your children to work in your business. In 2013, an under-18 employee can earn up to $6,100 without incurring any federal income tax. Your under-age-18 employee-child’s wages are also exempt from Social Security and Medicare taxes and federal unemployment tax. These tax exemptions for your under-18 children whom you employ are only available when your business is either: (1) a sole proprietorship, (2) a single-member LLC that is taxed as a sole proprietorship, (3) a husband-wife partnership, or (4) a husband-wife LLC that is treated as a husband-wife partnership for tax purposes.

When you put your children on the payroll, you are, in effect, tax deducting the money you might give your children anyway.

This tax deduction will lower your federal income tax bill next year, and if you are self-employed – your self-employment taxes, along with the taxes you pay to the State of South Carolina. Consider, too, that since your adjusted gross income will be smaller, you may be able to escape having to pay the 0.9 percent Medicare tax on earned income, as well as the 3.8 percent Medicare surtax on investment income.

There are some meaningful non-monetary advantages as well: your children may gain some valuable real-world work experience, and, through the opportunity to save a meaningful portion of their income for college and other future expenses, they can learn the value of thrift and savings.

Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience.

Got a financial planning question for Greg? You may e-mail him at