The best way to give to your chidlren
Creative & Tax-Conscious Ways to Give Kids Money
Washington politicians demonstrate on a daily basis that it is easier to spend other people’s money than to part with one’s personal funds. Similarly, most parents know all too well that a child who freely spends parental resources usually becomes more “tightfisted” when the money comes out of the child’s account. While such behavioral economics are probably human nature, the tax code offers opportunities for parents to help kids budget better and make money stretch farther – if parents know what to consider.
Parenthood and future expenses go together. While some expenses are happy events, other purchases are more challenging. Wedding budgets can be a particularly heated topic, with parents and children disagreeing on the appropriate “investment” amount for the wedding, reception venue, food and related costs. While weddings are a happy occasion, they are also an emotional time. And any time positive emotions (weddings) or negative emotions (funerals) come into play, the atmosphere is conducive to making decisions we might not make in more rational moments.
There is a solution to the wedding budget quandary. Let’s get money into our kids’ accounts now with their names on it and a clear, shared understanding of the future purpose. If a daughter wants to use her account for a wedding dress, then that’s her call. If another child wants to use his account for the down payment on a home or honeymoon excursion, the choice is his! The account holders can even opt to leave the money in an account, watching the funds accumulate over time. When children withdraw money from their own accounts, the price of their desired purchases often seems much more expensive. Dollars are stretched and budgeting lessons are learned.
Parents, grandparents and other generous parties should consider the tax code when funding a child’s account. Individuals can give anyone in the country – blood relation or not – up to $14,000 per year without either party incurring tax consequences, provided there are no restrictions on how the recipient uses the money. Some people give money or appreciated stock as a gift, but these gifts can also be used to pre-pay a planned expense. The money can be placed in a traditional account or a Roth IRA.
Assuming a child earns income and is not funding their own IRA, they can add up to $5,500 to the account; if they are under age 50 and if they have earned that much income to fund a Roth IRA. Unlike a traditional IRA where account holders must wait until age 59.5 to get the money out, Roth IRAs allow for immediate withdrawals of contributions without taxation or penalties. Using resources wisely and leveraging the tax code can help parents plan for anticipated future expenses in a more controlled and non-emotional manner.
Families don’t talk about finances enough, let alone use multigenerational strategies to improve their tax liability and stretch their dollars. A conversation with your kids and financial advisor may well be in order.
Joseph “Big Joe” Clark is a Certified Financial PlannerTM and the Managing Partner of Financial Enhancement Group, LLC an SEC registered Investment Advisor. He is the host of “Consider This” found on WQME Saturday mornings at 9am and Shine 99 on Sunday’s at 10am. Joe also is a former Adjunct Assistant Professor at Purdue University where he taught the capstone course for a degree in Financial Counseling and Planning. Securities offered through World Equity Group, Inc., member FINRA/SIPC, a broker dealer and SEC registered Investment Advisor. Advisory Services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated and are not affiliated. Tax advice provided by CPAs affiliated with Financial Enhancement Group, LLC. Big Joe can be reached at firstname.lastname@example.org, or (765) 640-1524.