Do you wish you knew then what you know now? While we cannot turn back the hands of time, we have the power to impart our hard-earned wisdom to future generations. We can set our children and grandchildren on a path to financial success.
What financial principles and tactics should we teach and implement for our children?
Principles to Teach:
Commit to Learning - Teach your children the principles of responsible money management. Share your own experiences, both the successes and the setbacks. Encourage them to explore financial literature and foster a lifelong commitment to learning. The more they know, the better equipped they will be to navigate the challenges ahead.
Start Early - One of the most valuable lessons we can share is the importance of saving, investing, and giving early in life. Open the door to discussions about savings accounts, investments, and the magic of compound interest. You can provide them with a head start, enabling their money to work for them throughout their lifetime.
View Money Differently - Help your children view money as a tool - a tool meant to provide opportunity, rather than a source of entitlement. Encourage them to set goals, create budgets, and prioritize financial stability. You can empower them to build wealth that can benefit future generations.
Develop a Long-Term Mindset - Help your children understand the value of delayed gratification and view their financial journey as a marathon, not a sprint. By fostering patience and discipline, you enable them to make choices that prioritize their future financial well-being over short-term desires.
Tactics to Implement:
Tax-Advantaged Accounts - Leveraging tax-advantaged savings accounts delay taxes on your earnings, deductions on what you save, and in some cases, completely eliminate taxes on your gains. These accounts also protect your money, encourage discipline, and offer diverse investment options.
Convert 529 Plan Funds to a Roth IRA - Due to a recent change in tax law, beneficiaries of 529 college savings accounts are now permitted to roll over up to $35,000 over the course of their lifetime from any 529 account in their name to their Roth IRA. These rollovers are also subject to Roth IRA annual contribution limits, and the 529 account must have been open for more than 15 years.
With these added capabilities, we are witnessing a significant uptick in interest and usage of 529 accounts. This new flexibility provides families with more control over their education savings, enabling them to adapt to changing circumstances and optimize their financial planning strategies.
Open a Roth IRA - Once a child earns income, they can open a Roth IRA. These accounts bring years of tax-free compounding and provide an opportunity to build a nest egg with little money down. We often see parents or grandparents matching the child’s contributions to encourage and reward the practice of saving for the future.
Contributing to your child’s Roth IRA involves several key steps.
- Ensure the child has earned income, often from part-time jobs or self-employment, as allowances and gifts don’t count.
- Set up the Roth IRA with an adult custodian if the child is under 18.
- Deposit the child’s earned income, not exceeding the annual contribution limit ($6,500 in 2023) into the account.
- Select investments within the Roth IRA that align with the child’s financial goals and risk tolerance.
- Transition ownership over to the child at the age of majority, typically 18 or 21.
We hold the power to shape the financial livelihood of our children and grandchildren. By sharing our wisdom, teaching financial principles, and empowering them to make informed decisions, we give them a priceless gift – a head start toward financial success. Together, we pass the torch of financial wisdom, illuminating the path for future generations to thrive.
Taylor Vance, CFP®, Financial Planning Analyst
This report is intended to be used for educational purposes only and does not constitute a solicitation to purchase any security or advisory services. Past performance is no guarantee of future results. An investment in any security involves significant risks and any investment may lose value. Refer to all risk disclosures related to each security product carefully before investing. Soundmark Wealth Management, LLC, its advisors and its affiliates do not provide tax or accounting services. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax or accounting advice. Please consult with your tax advisor prior to engaging in any transaction.