Saving for the Next Generation
Written by: Harmony Wagner, CFP®
Welcoming a new child into the world is an exciting time for parents, grandparents, friends and family. As we guide clients through many different phases and transitions of life, we often provide counsel to people who are interested in transferring wealth to the next generation. My husband and I just welcomed our second child a few months ago so this topic is especially close to my heart. The desire to lay a good financial foundation for the important people in your life is a noble one, but it can be difficult to know how to support a child’s financial future in a way that provides the maximum benefit. In this article, I will discuss several different strategies for passing wealth and wisdom to the next generation.
529 Plans
One of the most popular savings vehicles for educational expenses are 529 plans. These plans offer tax benefits and can be used towards qualified educational expenses including private school, college, graduate school, or trade school. For more details on 529s and their counterpart Coverdell ESAs, visit my colleague Vincenzo Testa’s recent blog article here: Planning for College Expenses.
UTMA/UGMA accounts
The Uniform Transfer to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA) accounts are custodial accounts that provide a more flexible alternative to 529 accounts. Since custodial accounts can be used for any purpose, they can be more flexible than 529 plans which are for educational expenses. For those who are concerned that their child may not pursue any level of higher education, the flexibility of this account may be attractive.
One of the potential risks of custodial accounts is that once the child reaches the age of majority (age 21 in New York), the assets transfer fully to his or her name and can be used as the individual sees fit. Not all 21-year-olds are responsible enough to inherit a significant sum of money without any oversight from an older adult.
Roth IRAs
One of the best savings vehicles for young people is Roth IRAs, but many people do not realize that an individual is eligible to open a Roth IRA as soon as he or she begins earning money. Parents, grandparents, and other loved ones are able to fund Roth IRAs on behalf of a teenager as long as that teenager has earned income. The maximum contribution allowed for someone under 50 in 2022 is $6,000; this amount is also limited by the individual’s earned income. For example, if your 16-year-old daughter earns $8,000 in 2022, her Roth contributions (whether made by her or someone else on her behalf) are limited to $6,000. However, if she only earns $3,000 in 2022, her contributions would be limited to the amount she earned so she could only contribute $3,000 for that tax year.
Because Roth IRA assets grow tax-free and can be taken out tax-free in retirement, it is a great way to put money away for the future and take advantage of tax-free compounding over decades. Although Roth assets are typically intended for retirement, there are several exceptions that would allow someone to use these assets earlier, such as a first-time home purchase.
Sharing Financial Wisdom
Some folks have ample discretionary cash flow to put towards accounts like the ones I mentioned above, while others may not be in the financial position to contribute much. Whether you can max out a 529 plan each year or give $50 as a birthday gift, this final strategy is something that everyone can do. I am a big believer that the most important asset you can provide to the next generation is not just wealth but the wisdom to manage it well. In practical terms, this might look like a number of different things.
- Teaching how to build a household budget
- Matching dollars saved towards a certain goal (i.e., college, a car, etc)
- Gifting a single share of stock to teach how the equity market works
- Having transparent conversations about financial mistakes you may have made
These are just a few examples of ways to impart prudent financial habits to the important young people in your life. Knowledge in this area often serves a young person better than a large sum of money ever could. If you would like to continue this discussion or have any questions related to saving for the next generation, please feel free to contact our team!
Bouchey Financial Group has local offices in Saratoga Springs and Troy, NY.
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