Here's a creative tax strategy that sounds great until you actually think about it. A Kentucky father named Robert called "The Ramsey Show" with what he probably thought was a clever workaround. His kids used to have legitimate W-2 income from modeling and commercial work tied to his business. That income funded their Roth IRAs perfectly legally. But after selling the company, that income stream dried up.

So Robert wondered: Could he just pay his kids for household chores, track those payments, and use that as earned income for tax and retirement purposes?

Personal finance expert Dave Ramsey delivered the bad news immediately. "You can't pay a kid for doing chores and file taxes on it," Ramsey said, warning that this approach would crumble the moment the IRS took a closer look.

The Problem With Paying Kids for Chores

The issue comes down to what the IRS considers legitimate earned income. Roth IRAs can only be funded with income that's reported on a tax return and can actually be defended as real work. Household chores don't make the cut.

"You have to have an earned income to fund an IRA, and you have to file a tax return on the earned income," Ramsey explained.

The income needs to come from work performed outside the home or from verifiable labor that someone outside the family would reasonably pay for. Whatever income gets used to fund a Roth IRA must also show up on a tax return when required.

There's another wrinkle. The wages need to reflect fair market value. If you pay your teenager $50 an hour to take out the trash when a neighborhood kid would do it for $10, that's going to raise red flags. "That won't survive an audit," Ramsey said.

How to Actually Do This Right

Ramsey knows this territory well because he navigated it with his own children. He described how they earned income that legitimately qualified for Roth contributions. They performed documented work outside the home or completed verifiable tasks at his office, including selling books at events. He also counted money they earned independently through babysitting, dog sitting, and yard work for neighbors.

"That's all we could, with integrity before God, tell the IRS that they really made," Ramsey said. In one example, he described a year when his child earned exactly $1,223 after all legitimate income was tracked and added up.

A tax return was filed on that $1,223, and the same amount went into a Roth IRA. Ramsey covered the tax bill since the child was young, but the underlying income was completely legitimate and defensible.

The long game paid off. By repeating this process consistently through the years, his children ended up with Roth IRA balances exceeding $50,000 by the time they finished college. Not bad for starting with babysitting money and book sales.

When This Strategy Makes Sense

Ramsey emphasized that funding Roth IRAs for children isn't something you prioritize early. In his Baby Steps framework, a sequential approach to personal finance, this falls into Baby Step Seven. That means it only comes into play after you've paid off your mortgage, established your own retirement contributions, and handled college savings.

He circled back to his earlier warning about inflating wages. "You can't pay someone five times what the job pays in the marketplace," Ramsey said. The takeaway is straightforward: if you want to help your kids build wealth early through Roth IRAs, the income has to be real, the work has to be legitimate, and the wages have to make sense. Anything else is just asking for trouble with the IRS.