Budgeting, managing debt, saving for big purchases (such as a house or car), and saving for retirement are part of the many things not taught in high school or college. Managing money and preparing for retirement may be rude awakenings at some point in a young adult’s life. But with a little help, there are several ways you can help your child build wealth quickly as they enter the workforce.
Before you can provide guidance in a young adult’s financial future, you first need to make sure you are prepared. You want to make sure you are in a good financial situation for retirement yourself. It would be best if you are financially prepared for medical costs that may arise when you grow older and have an emergency fund established. It’s best to speak with your financial advisor regarding this. The following items highlight ways in which you can help your child prepare for their financial future.
WAYS YOU CAN HELP YOUR CHILD BUILD WEALTH
1. Set up an ESA or 529 plan as soon as your kids are born
These are tax-deferred plans used for educational savings. The sooner you can begin stashing away money for your child’s education, the better, as gains are compounded year over year. The elimination of student debt or even a good chunk of your child’s college tuition will lay the groundwork for financial success. Both offer tax-deferred advantages on growth in the account. According to credit.com, the average college debt is $31,172, so if you can partially or fully fund your child’s education, this can relieve a significant strain on their financial stability. Click here to learn about the comparison between 529 plans and ESAs (Education Savings Accounts).
2. Help them pay off debt
Now, there is a difference between reckless debt and manageable debt. If your credit card is maxed out because you have reckless spending habits, there are bigger issues than simply paying off a credit card. But if your child has debt that is somewhat out of their control, such as student loans, a mortgage, or a car loan, any help you can give will further advance your child’s financial success.
3. Let them live at home
You may be itching to see your kids off (and who could blame you), but there are many advantages of allowing your child to live at home after graduation. Rent can be costly, so living at home will allow your child to save for a downpayment on a house and/or pay off their student loans. Even charging your child a minimal rent fee or being responsible for some utilities while living at home can help them save for their future.
4. Gift up to $15,000
The IRS allows each parent and grandparent to gift up to $15,000 a year to each child and grandchild tax-free (the maximum you can gift in your lifetime is $5.6M as of 2020). You can gift more than $15,000 per year, but you would owe taxes on the portion that exceeds the $15,000. Again, the quicker your child can eliminate debt, the faster you can have your child build wealth.
5. Max out their IRA
If eligible, make your child put your gift of up to $15,000 into a retirement account. Making contributions to Traditional and Roth IRAs (if eligible) allow for earnings to grow tax-deferred. You can contribute up to a maximum of $6,000 to an IRA if under the age of 50. Roth IRAs are an especially powerful tool for saving, retirement, and even an emergency fund. Click here to read our article about the benefits of gifting to a Roth IRA account.
6. Max out their HSAs (if eligible)
Another option for your gift of up to $15,000 is an HSA contribution. You can contribute $3,550 per calendar year to an HSA account (as of 2020). This contribution is tax-deductible, regardless of income level.
7. Max out their 401(k)
Financial advisors suggest contributing to your 401(k) to match your employer’s contribution (if applicable) and/or to the maximum contribution amount. After all, the employer match is essentially free money that can be put away for retirement. 401(k)s have a high contribution limit ($19,500 in 2020 for people under age 50). If you can gift your child money, you may want to ensure they are upping their contribution limits to their 401(k)s.
8. Sell or gift your old vehicle
When you trade-in your vehicle, the dealership will make money by turning around and selling it for a premium to the trade-in value they gave you. When buying used cars, it can be challenging to gauge how well the vehicle was taken care of unless you’re a mechanic. You know your vehicle best and how well it was taken care of, so why not sell it to your child for the trade-in value or less? Doing this could be a win-win as you have the extra cash for the new car purchase, and your child receives a car for less than a used car from a dealership.
9. Lend them an emergency fund
Life is full of surprises. With no emergency fund, an unexpected charge to a credit card can create a snowball effect on wealth as credit cards carry a very high interest rate. Going into credit card debt is one of the last things you would want to happen to your child. If you can, loan them money for the emergency.
Every little bit helps. Just doing one or a few of the above items will help your child stay debt-free and prepare for their financial future. There are also many tax-deferred ways for your child to grow wealth, which should be taken advantage of when they have the income and opportunity to do so. The earlier they can begin saving in tax-deferred accounts such as 401(k)s, IRAs, ESAs, and HSAs, the better as their gains will compound year over year.
If you have any questions regarding helping your child build wealth, please contact us at (239) 333-1032 or visit our website at www.midlandtrust.com.
MIDLAND TRUST IS NOT A FIDUCIARY: Midland’s role as the custodian of self-directed retirement accounts is non-discretionary and administrative in nature. The account holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account. Midland has no responsibility or involvement in selecting or evaluating any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.