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Investing in Your Kids and Grandkids: 529’s, Roth IRA’s, or Outright Gifts?

Retirement planning isn’t just about fueling up for the flight to that dream destination. A lot of my clients at Keen Wealth also want to plan the most tax-efficient and responsible ways to set aside resources now that will support their kids and grandkids as they get started on their financial journey. That may mean a college education, buying a first home, or even giving them a head start on their retirement planning.iTunes Between Now and Success

On today’s show, we weigh the pros and cons of various investment and savings accounts to help you pick the best tools to provide for your child, and impart a little financial guidance to your heirs in the process.

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Insights from Today’s Podcast on Investing in Your Kids and Grandkids

Here are four of the most common options for parents and grandparents:

1. 529 Accounts. 

A 529 is a specific vehicle that helps pay for a college education. These accounts are popular because both deposits and withdrawals are tax-deferred as long as the money is used for education. However, we do caution our clients against investing too heavily in these accounts unless there is high certainty the kids are going to attend a two or four-year post-secondary school. If the kids don’t go to college, or opt for a trade school, there are significant tax consequences involved in withdrawing that money for other purposes.

Also, before your kids get too excited, you might want to let them know that the government has a very narrow definition of “college expenses.” Room and board and tuition? Yes. A new flat-screen TV and Xbox? No.

Finally, once the money does start coming out to pay for allowable expenses, it’s your responsibility to keep receipts in case the IRS asks you to prove how the money was spent.

2. UGMA and UTMA.

The Uniform Gifts to Minors Act and the Uniform Transfer to Minors Act are not as popular as they were twenty or so years ago, but some of our clients do still ask about them. They allow parents and grandparents to title money in the name of their kids, and hopefully, take advantage of some of the lower tax brackets that the kids might have available.

The problem with these accounts is that they are not earmarked for education, or anything else. Once the child becomes a legal adult (18 – 21, depending on the state), the money is his or hers, free and clear.

As all parents and grandparents know, legal adulthood isn’t a great standard for emotional maturity. So in the ‘90s, a lot of adults just wouldn’t tell their kids about these accounts, even when they came of age. Brokerage firms started to crack down, because, legally, the kids had a right to know about that account and use the money, whether the benefactor liked how the money was spent or not. Hence the decline in popularity of these accounts. But even if you do trust your kids to use a big chunk of money in the best possible ways, we believe there are better savings and investment tools available.

3. Roth IRAs.

We’ve previously covered the benefits of investing in a tax-deferred Roth IRA from a retirement perspective, but you can also withdraw money from a Roth to pay for qualified higher education expenses without incurring the 10% penalty. And any money that you don’t spend on college remains in the account for your own retirement savings.

Personally, I love the Roth IRA, and I think it’s a great way to involve your kids in their long-term finances, even at a relatively young age.

I made a deal with my two daughters as they were working part-time during high school and college: every dollar they earned, I would match and deposit into a Roth IRA in their names.

Now, as they’re graduating and transitioning into the working world, they already have sizeable nest eggs waiting for them. The principle can always be withdrawn without penalties or taxes, but hopefully, my girls will continue to grow these accounts and use them to fuel up their own dream trips into retirement.

4. Keeping it simple.

Of course, the easiest options will always appeal to a lot of people: gifting, or joint bank accounts.

Both options are low on hassle. You and your child can open a joint account, put both of your names on it, and make deposits. And you can gift your child up to $14,000 in 2017, tax free; your spouse can gift $14,000 too, for a total of $28,000 with no gift tax consequences.

But you can probably guess the downside of this approach. Just like with UGMA and UTMA accounts, your child has access to the money, no restrictions, no guarantee the “adult” is mature enough to make smart decisions with your generosity.

Let the pros help.

Financial planning of any kind can be overwhelming, and decisions about your legacy are one area where working with a fiduciary advisor can add a lot of value. If your child has some skin in the game, it will help him or her to learn how to live in the world. And if you pick investment tools that harness the power of compounding interest, your gift to your kids will be greater in the long run.

You’ve worked too long and too hard to settle for an easy option just because it’s the easiest. We recommend sitting down with a fiduciary advisor who will walk you through your options so that your kids will benefit from the wisdom of your planning and your prudent example, and not just from your money.

 Bill Keen on Investing in Your Kids and Grandkids …

“If your kids have some skin in the game, it will go a long way towards helping them plan responsibly for their futures.”

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Got a question or comment? Email it to me and we’ll get back to you or call our office at (913) 624-1841. 

About Bill

Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 24 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.

Keen Wealth Advisors is a Registered Investment Adviser. Nothing within this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Keen Wealth Advisors manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed here. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.  

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