4 WAYS TO INVEST WITH YOUR KIDS

Welcome to The Wealth Span - if you want to join the growing list of folks learning about investing for longevity each week, subscribe below...

Feel free to read the most popular posts and connect with me on LinkedIn!

Now - today's post...

___________________________________

Many people have a desire to provide their children with a head start in life or a sort of financial foundation. 

In lots of families, saving for college is a focus. Those who place a high priority on education may start funneling dollars toward paying for future tuition and books.

Some parents may want to help pay for a first car or first home, reducing or eliminating some major hurdles in the early stages of adult life.

Perhaps the focus will be establishing financial assets on their children’s behalf, fulfilling a long-term goal of creating a family legacy.

In the end, the purpose for the funds will determine the tool you choose to use to save for and invest alongside your children.

___________________________________

Custodial Roth IRA

The Roth IRA is one of the best saving tools for adults. Any list about saving and investing alongside a child should include it too.

First, let’s get an important disclaimer out of the way. A key downside of the Roth IRA is that the child must have taxable income. There are ways to create taxable income for your children or you can wait until they receive income from a job. 

If you decide to get creative and hire your child, it is best to establish a plan alongside a CPA. Tax laws can be complicated, and you will want to do it the right way.

When using a Roth IRA to save and invest for children, it is common to establish a matching program comparable to what many folks have with their employers 401(k). The child contributes $1, and the parent matches by contributing $1. This encourages investing and promotes delayed gratification.

The dollars invested as a teenager and young adult have immense potential due to the especially long time horizon. Investing within a Roth IRA is a long-term play. It offers the huge benefit of tax-free growth for an investor (in this case, your child) with an especially long time horizon.

Although widely popular for adults, the Roth IRA is not as common a tool for kids. If you choose to go this route, your child will be a rare case with the opportunity to watch any contributions compound for decades.

529 Plan

Many families open a 529 at birth or shortly thereafter. This saving tool is designed specifically for higher education and remains one of the most popular savings vehicles for families.

The child/student is able to withdraw funds from the 529 account without paying taxes. It must be for a “qualified expense,” but the definition is broad enough to include room and board plus essentially all of the common costs in college. Although a less common functionality, a 529 plan can also be used to pay for elementary/secondary private education too. 

The 529 plan typically does not have the flexibility and investment options of a standard brokerage account, but it does allow for the parent to take a tax benefit in the year the contribution is made. Many states in the US allow 529 contributions to offset your state tax bill.

It is easy to start saving in a 529 plan and nearly anyone can do so (parents, grandparents, aunts/uncles, etc).

The tax-advantaged nature of a 529 plan makes it an immensely useful and common way to save for education expenses.

UTMA/UGMA

For definitional purposes, the Uniform Transform to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA) both allow for adults to give a child a gift with tax benefits. Although sometimes used interchangeably, these two accounts are essentially different versions of a similar law. 

We will talk about the UGMA for simplicity’s sake. If you would like information specific to the UTMA, head this way.

The UGMA allows an adult to transfer financial assets to a minor. The adult custodian manages the account up to the point the child turns 18.

The earnings/growth from the UGMA will be taxable but will be taxed at your child’s tax rate (up to a certain dollar amount), not yours as the adult.

Because of the easy process to create an UGMA, it is a popular tool for families.

Trust Accounts

Although there are more hurdles in the process of establishing a trust, there are some unique benefits of doing so.

All of the other accounts on this list either, a) lose utility eventually (529 Plan) or b) are entirely transferred to the child as they become an adult (Custodial Roth IRA and UGMA). A trust account allows for a degree of control because the trust document can provide specific directives and guidance about how the funds will be used. 

Perhaps you would like the funds in the trust to be used exclusively for a house or to pay for tuition. Many trusts make funds available in installments instead of a single lump sum payment. Either of these objectives (and nearly any other) can easily be accomplished in a trust document.

There may eventually be more content concerning trust accounts on The Wealth Span. In the context of saving/investing alongside children, just know that the trust has unmatched characteristics - control and customization. Because of this, it is a useful (and popular) way to accomplish any saving goals.

All of the Upside

There are quite a few benefits to investing alongside your children.

1 - Provide extra time for compound growth to take place.

We know that an extra year of compound growth can prove to be important. Whether the funds will be used for education purposes or in purchasing a home, we can all agree that more time and a larger total is typically better.

When your child reaches adulthood and even the later stages of life, they will be grateful for what you did to start their investing journey.

2 - Teach principles about investing.

Maybe you didn’t experience the benefit of learning about saving and investing from an early age. As you save for or alongside your children, you will be able to provide them with practical knowledge about what it takes to invest.

Luckily, The truths about investing are transferable, the foundational principles of investing provide value in everyday life too. (e.g., allow time/money to compound, understand delayed gratification, ignore excess noise, stay diversified, etc.)

The chance to provide for your children does not stop with the dollars you transfer to an account. Eventually the money will be used, but the teaching you provide will last forever.

___________________________________

TL;DR

There are many ways to save/invest on behalf of or alongside your children.

In the same way investing/compound growth are vital tools of wealth building for adults, these foundational principles can be applied to saving for your children’s futures.

To top it all off, you can have the unique experience of sharing these important principles about investing with your children.

___________________________________

By nature, this is just a knowledge drop. If you know someone who recently became a parent or who is already a parent, share the article.

Thank you for your attention in a busy world. If you have any questions, don’t hesitate to reach out. Take care!