2 Ways to Help Adult Children Financially | Rodgers & Associates

2 Ways to Help Children and Grandchildren Financially…Without Spoiling Them

“Don’t save what is left after spending; spend what is left after saving.”– Warren Buffet

One of the most important financial lessons to teach our children and grand­children is the impor­tance of saving and investing. We all start out life by working for money. The goal should be to put some of the money we work for aside regularly and invest it. Eventually, we could have enough money working for us that we no longer need to work for money. We will have achieved financial independence!

Parents and grand­parents often ask me how they can help their children achieve financial indepen­dence without spoiling them. They are in a financial position to make gifts but are not sure if financial gifts would help or harm them. Here are two smart ways to gift that can offer some immediate benefits and help them along the way to financial independence.

Make a Roth IRA Contribution

Put your children and/or grand­children on the path to a secure retirement by making a Roth IRA contri­bution for them as soon as they have earned income. Any child or grand­child that receives a W‑2 can make a Roth contri­bution based on this income regardless of their age. Funding a Roth IRA, or any retirement account for that matter, is usually not a priority for a teenager’s part-time income. This is an oppor­tunity for parents or grand­parents to start saving for the child while they are young. Small amounts invested can go a long way when you are young and have years for the money to compound.

The maximum contri­bution in 2019 is $6,000 or 100% of earned income, whichever is less. You could make a Roth contri­bution based on the earnings they have from a summer job. Total up their W‑2 state­ments at tax time and make the Roth contri­bution for the total amount.

Let’s assume you make a $6,000 contri­bution to a Roth for your child every year starting at age 16 until they are 25. If no other contri­bu­tions are made and the account grows at an average of 7%, their Roth IRA would grow to $1,800,000 by the time they are age 60. Not bad for a $60,000 investment!

The earnings will be tax free when withdrawn, providing all other require­ments are met. Adult children living on their own may also qualify for The Retirement Savings Contri­bution Credit, known as the Saver’s Credit based on your gift to their Roth IRA. This credit may allow them to get a tax credit for up to half of what you contribute to their Roth IRA. Up to $2,000 of your contri­bution is eligible for the credit. They cannot be claimed as a dependent on anyone else’s tax return and their income must be within specific guide­lines to qualify.

2019 Saver's Credit Table

Source: IRS​.gov

Fund a Health Savings Accounts (HSA)

An HSA can be defined as a type of savings account you can fund on a pre-tax basis and use to pay for qualified medical expenses. These accounts are only available to people who are covered under a High Deductible Health Plan (HDHP) and do have limits on the amount of money you can contribute to them.

2019 HSA Contri­bution Limits:

  • Individuals: $3,500
  • Families: $7,000
  • $1,000 catch-up if age 55 or older

HSAs were designed for saving money to cover health expenses that aren’t covered by insurance. Many people use their HSA to cover copay­ments, deductibles, and other non-covered expenses. HSAs must be connected to an HDHP where the HSA helps patients cover the large deductible. The HDHP kicks in after the deductible is met to cover the more expensive health services like hospital stays.

Advantages of Gifting an HSA

An HSA has some important advan­tages over other ways of saving for healthcare costs:

  • Contri­bu­tions are pre-tax: Contri­bu­tions to an HSA are made pre-tax like a tradi­tional IRA or a 401(k)-retirement plan.
  • Deposits can carry from year-to-year: HSA contri­bu­tions roll over from one year to the next if they aren’t withdrawn for healthcare expenses.
  • Investment choices: Balances in an HSA can be invested in mutual funds and other financial instru­ments much like a 401(k). Investment options can help the account grow more quickly than a tradi­tional savings account.
  • Tax-free withdrawals:Funds withdrawn from an HSA for approved medical expenses are not taxable. The pre-tax contri­bu­tions and any earnings while the money was inside the account are tax-free when the funds are used for appro­priate medical expenses. This makes an HSA an extremely efficient way to save money for health expenses when you have a HDHP.

A good way to help a child or grand­child who is working for an employer that offers an HSA plan is to fully fund it each year for them. The contri­bution will help them save taxes each year on the amount invested. More impor­tantly the growth in the account can be used to cover future medical expenses tax-free.

For more ways to help your children or grand­children reach financial indepen­dence, here are some other gifting strategies to consider.

Rick’s Tips:

  • Any child or grand­child that receives a W‑2 can make a Roth contri­bution based on this income regardless of their age.
  • Contri­bu­tions to an HSA are made pre-tax like a tradi­tional IRA or a 401(k)-retirement plan.
  • Funds withdrawn from an HSA for approved medical expenses are tax-free.