Give Your Kids the Gift of Financial Know How
CATEGORIES: Editor's Picks
Teaching your kids how to manage money is one of the greatest gifts you can give. The benefits last a lifetime and give your kids the confidence and financial independence to achieve their various goals throughout their life – paying for college, wedding, home, their kids’ college, retirement…to name a few.
Hank Coleman of Money Q&A suggests two ways to give kids the gift of financial security.
Contribute to a 529 College Savings Plan
It’s never too early to start a 529 College Savings Plan for a loved one. The earlier you start saving for your kids’ college, the less likely your kids will have to take on student loan debt. For the teenagers in your life, use this as an opportunity to include them in the planning of this expense, including budgeting costs and creating a savings plan. As quoted by Ben Bernanke, “If kids are involved…in saving for college, it means a lot more to them.”
And there are tax benefits in it for you. Although it varies by state, contributions are deductible on some state tax returns. As for federal returns, there is no deduction available on contributions, but investments grow tax deferred and withdrawals used to pay for college costs are federally tax-free.
Contribute to a Roth IRA in their name
Once your kids are 16 and able to earn reportable income, they can have a Roth IRA with a contribution limit of $5,000 or the amount of their earnings – whichever is less. Even neighborhood gigs such as yard work and babysitting can be included in their earned income. But keep track of their earnings to make tax reporting easy. The benefit of compound interest for those years between the age of 16 and 22 (when college graduates usually enter the workforce) could be over a million dollars by the time they are 65.
To instill the lesson of investing for the long term, involve them in making decisions on where to invest that money.
Give up to $13,000 in appreciated assets
Bill Bischoff of SmartMoney recently reported how you can set up a loved one to pay 0% tax rate on investment income. For those in the 10%-15% tax rate bracket, the rate on long term capital gains and qualified dividends is 0%. The gains are considered long term if your ownership period plus the recipient’s ownership period is over one year. However, if your kid is below the age of 24, they might be subject to the “Kiddie tax” rule that would cause them to be taxed at your higher rates. Also keep in mind that any gift given above a $13,000 value could be subject to a gift tax.
Use this as a lesson in making investment decisions. Discuss the potential pros and cons of selling or holding the appreciated asset. It’s also a good chance to explain taxes to your kid and set their expectations for the tax responsibilities they’ll soon be subject to as they enter the workforce and consequently a higher income bracket.
Now what about you? In what ways do you teach your kids how to be financially independent?
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