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The Biggest Financial Boost you can give your Kids

Kathleen Owens

December 21, 2020

Aurora Financial Planning & Investment Management

Having your kids get a good start in life is the hope for all parents. We want our kids to get off on the “right foot” and not have to experience some of the avoidable struggles that we experienced in our youth.

We are all really busy in the present attending to daily life. And it seems that we can barely keep up with the day-to-day tasks that need to be completed. The “administration” of our life and the lives of our family members consumes us in the present.

That’s why it can be hard to think of the future.

You don’t know what you don’t know

What do we really need to do to set-up ourselves for a good future and set up our kids for a good future as well? Sometimes we don’t even know what a “good future” is. Each one of us may have a very different view of what our “ideal” future would be.

With our complicated tax code, rapidly changing technology that will affect your job, and the rising cost of education and healthcare, it can be difficult to know what information you need to know to imagine what your ideal future would look like. Knowing what’s possible can be hard to determine when our world seems to be changing by the minute.

For one person it may be paying off their home and retiring at an early age, say, 45 years old. For another it may be building a business that can be passed on to their children. So, while you’re figuring out what you want your future to look like, you can get busy and do something really wonderful for your child.

You can take advantage of a wonderful gift that your kids have, and that’s the gift of time. Funding a retirement account for them now, will pay off big time in the future.

The gift of time

Taking action now, will pay off ten to twenty years from now. Don’t be put off by the length of time. One has to be patient to grow wealth. Unless to win the lottery, it takes time to become financially well-off!

Warren Buffet knows a thing or two

Mr. Buffet, Chairman of Berkshire Hathaway, is probably the most successful investor ever. He adheres to a buy and hold strategy. He is a patient investor and often shares how he grasped the notion of compounding at a young age. He saw that investing early and being patient is the key to building wealth. Put your money to work for you instead of spending it. Buffet often jokes that he doesn’t want to get a “$300.00 haircut”. Inferring that the money that he will spend on a haircut; he will then not be able to invest that haircut money and have it compound and grow to a lot more money over the years. In financial lingo it called the opportunity cost. By spending the money, you’ve lost the opportunity to use the money for something else.

Let’s crunch some numbers to give you an impactful visual. Just investing $300.00 and letting the money grow in say, in an index fund with a conservative rate of return of five percent, you would have $1,297 in thirty years.

Imagine if you could be disciplined, focused and place investing as the highest priority in your life. How much could you set-aside each year?

Here’s an example if you could maximize the highest allowable amount to invest in a Roth account for your child for fifteen years.

The investment’s value would be $141,945 in 15 years! WOW! Has this graph gotten your attention?

The magic of a Qualified Individual Retirement Roth Account.

You may not know that you don’t need to be an adult to have a Roth account. A Roth IRA qualified retirement account, otherwise known as a Roth individual retirement account is an investment account that you can deposit after-tax earned income into.

Yes, the income has to be earned, not a gift. If you are a business owner, you can hire your young children to be models or spokespersons for your company. Or as the kids become older, they can perform age-appropriate tasks. It has to be real in order to pass the Internal Revenue Service’s “smell test”. You can’t say your kid is the CEO of your company. The IRS won’t buy that!

The child would be paid and taxes would be paid on the earned income. Then a Roth account is set-up as a custodial Roth account for the child that is under the age of eighteen. Currently, an individual can deposit after-tax earned income, up to $6,000 into a Roth account each year.

Think about it, if you could have your child earning income each year and depositing the after-tax income into the Roth account, your child could very well have a six-figure account by the time they reach eighteen years of age.

My daughter was a child model for a national department store when she was about 20 months old. She could not walk yet, but she was earning a paycheck. She’s also done modeling and administrative work for my website. By the way, my daughter is the hand model for the cover photo for this blog post! She was 16 years old at the time. She has very pretty hands. Let's just say she didn't get her pretty hands from me!

The experiences she had by working helped her build self esteem and she was proud of the work she did. At a very young age, she was exposed to the business world (with me by her side, of course).

The world is a competitive place and it’s your job as the parent to show your kids how to find the opportunities that are out there. Wouldn’t this be better than your kids laying around the house all day playing video games?

So, there are a lot of employment opportunities for kids. You have to diligent to find these opportunities, or be creative and help your young entrepreneur create a gig for themselves.

Now a days, many kids have figured it out pretty quickly and are earning great income online. As long as it’s legit and you keep good records, you should not have a problem with the Internal Revenue Service questioning the earned income on the Roth account.

You may be wondering how this account could affect college financial aid. Qualified retirement accounts, such as a Roth IRA account whether owned by you or by your child, are not counted at all in determining expected family contribution for purposes of federal financial aid.

Use time to your advantage

A Roth IRA is a fantastic way to put money away and just let it grow. There are some rules on the Roth account, that you need to be aware of. The account must be held for five years before any gains on the money can be withdrawn and the account holder needs to be at least 59 ½ years of age to take distributions of the gains without a 10% penalty. Also, one tricky rule is that the five-year rule does reset each time you convert an IRA account into a Roth account. However, there are exceptions to some of these rules.

You can take early withdrawals without penalty for hardship reasons: pay for medical expenses that you are unable to deduct on your tax return, pay for medical insurance when you become unemployed, or you become permanently disabled. You can also pay for qualified higher education expenses. In addition, you can use (one time only) up to $10,000 of the funds to buy, build or rebuild a first home.

Remember: any of your contributions (not the gains) can be accessed any time. You already paid taxes on that money!

You will never have to worry about taxes being paid on the withdrawals and there are not any required minimum distributions like there are on a traditional IRA account.

This strategy is applicable NOW.

Who knows what congress might do in the future to change the laws pertaining to retirement accounts.

So, what are you waiting for? This is an absolutely no-brainer. My firm can assist in setting up the record-keeping for tax purposes, opening the Roth account and determining the investment portfolio. Thanks for your time. I hope this information helps you!


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