How to Responsibly Help Your Kids with Money

January 26, 2017 | By Jon Powell, CFP®| Money Management

On average, young adults today have more debt and earn less money than their parents did at the same age (adjusted for inflation); rent and housing costs, in and around cities, have significantly outpaced wage growth; and increasing automation and globalization are creating new challenges for young people trying to start a career.

Because of this economic environment, your children and/or grandchildren are likely struggle with money and finances more than you did. So, what are some ways you can help your kids with money?

One of your first concerns might be “What if I don’t trust that my kids will make responsible decisions with the money I give them?” This is a prudent concern. Fortunately, there are a number of ways to gift assets that inhibit or restrict their use to certain purposes.

These tactics can help ensure that you can help your kids with money, but ensure they don’t just blow it on frivolous purchases.

One consideration when planning gifts is the annual limit you can give without filing a gift tax return with the IRS. For 2017, that limit is $14,000 per recipient (as a married couple, you can combine your limits to $28,000 per recipient).

Exceeding this limit isn’t a big deal in the near term, but could create complications in your eventual estate.

Gift to a Roth IRA on Behalf of Your Kids or Grand Kids

A Roth IRA is an excellent savings vehicle for retirement. Contributions to these accounts grow tax-advantaged and all earnings are tax-free when taken as qualified distributions in retirement. There is an annual contribution limit to a Roth IRA of $5,500/year (for those under age 50).

So, you aren’t able to hit the full gifting limit with just this type of account. Since a Roth IRA loses its favorable tax treatment if withdrawals are non-qualified, this helps safeguard against the premature, irresponsible spending of the funds.

As a parent, or grandparent, you can simply write a check to your intended recipient’s Roth IRA account. The caveat here is a contribution can only be made up to the amount of earned income that individual will report for the tax year.

So, this strategy will not apply to the very young. However, it is perfect for a child with a high school job or even young adults that do not have the financial latitude to make retirement account contributions on their own behalf, due to tight budgets.

Contribute to 529 Plans to Assist with College Costs

With the sky-rocketing costs of a four-year college education, one of the most effective ways to assist your children entering adulthood is by helping to reduce or eliminate their debt from school. By providing some or all of the cost of education, they can avoid many years of financial setbacks when beginning a career.

A few months ago we went in depth on the benefits of utilizing 529 plans to fund education. These accounts may allow you to take a state tax deduction up to certain limits for contributions made to a 529 plan account.

Furthermore, growth and withdrawals from these accounts, used for qualified education expenses, are completely tax free (similar to in practice to a Roth IRA).

Another perk of a 529 plan allows you, the contributor, to be the owner of the account. This gives you full control of the management of the assets, and ultimately, the distributions.

Should your intended recipient not attend college, you are free to change the beneficiary to another child or relative and still receive all of the same favorable tax treatment.

Contributing to a 529 for a grandchild will not only be a much appreciated boon to your grandchildren themselves, but their parents (your children) will likely appreciate it even more.

Utilizing a Trust to Help Your Kids with Money

In the event that the strategies above have been satisfied and you still want to give more, you can always set up a trust account. On the surface, trusts can scare away many people who don’t have an understanding of how they work.

However, trusts do not have to be these complex financial arrangements. Simply put, a trust can be thought of as just an account with specific rules that govern its management and distribution.

A trust can be established for any reason and with pretty much any restriction or stipulation you’d like to direct the receipt of assets by the beneficiaries. For instance, a common trust set up can pay a percentage of the account out to its beneficiaries at periodic ages.

So, if it were set up to benefit your grandchild, you could have the trust distribute 20% of its balance at age 18, then another 20% at age 25, another 20% at age 30, etc…

Have a Plan Before Engaging in a Gifting Strategy

As long as you want to help your kids with money, there are ample ways to set them up to succeed. As many of our clients enter the later stages of their life, the desire to help their offspring grows. We help our clients understand their situations to implement the gifting strategies that are best suited for them and their children.

Are You Ready to Speak with a Financial Advisor?

Once you determine that it might be time to work with a financial advisor, it’s important to find the right advisor for you and your family. We’ve put together a guide of questions that are essential to ask an advisor before you hire them.

20 Questions to Ask a Financial Advisor

Don’t make a mistake by working with the wrong financial advisor. Ask the right questions the first time to determine if a financial advisor is right for you.

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