Don’t neglect the new generation – Carosa
What do you tell clients when you’ve told them everything they need to know to help them retire in comfort? Try 'Child IRA.'
The phone just rang. It was from a name I didn’t immediately recognize. Turns out it was someone who attended one of the presentations I did during the book tour last spring for From Cradle to Retirement.
The talk explained how the book offers both a theoretical as well as a practical approach to setting up a Child IRA.
Though written for the mass-market audience, I’ve always felt clever financial professionals could see how the Child IRA could enhance their business.
The call was from one of those clever financial professionals. It wasn’t the first, though, and frankly, I’m surprised there haven’t been more.
The idea of the Child IRA has immediate appeal to nearly every parent, grandparent, aunt, uncle, and neighbor I’ve had the pleasure to meet on my book tour. It answers the question they don’t want to admit they’re thinking about (see “The Fiduciary Parent: How to Best Protect Your Child From the Day When the Promise of Social Security Finally Fails,” FiduciaryNews.com, November 6, 2018). Smart advisers know they’re thinking about it and, when the opportunity presents itself, they reveal this tactic to their clients.
This is the time of year when the opportunity presents itself. Many minds begin turning to year-end tax planning as we head into the holiday season. Why? Because, for several popular tax-saving strategies, the window closes at the stroke of midnight on December 31st.
I’ve been collecting anecdotal stories from advisers about when they’ve found their clients most receptive to the idea of a Child IRA. I’ll share a few of them with you here just in case you find yourself in a similar situation. To make it easier, I’ll break it down by broad categories.
Young adults/Recent college graduates: By the time their kids are beyond college age, the parents ought to be in a more comfortable financial position. After all, they’re not supporting their kids anymore. But should they?
Adults in their 20s often find it difficult to save for retirement. All their earnings go for immediate expenses of ginormous college loans.
With their earnings, they’re eligible to save for retirement. The reality, however, shows they don’t have the cash flow to do this. This is where parents can offer a boost, even if it’s just a small one. They should consider gifting money to their kids that could then be contributed to a retirement plan.
Every little bit helps. It’s better to make small investments now than be up a tree with older adult children who are miserable when they realize their retirement savings just isn’t there.
Teenagers: This is the age when many children discover the joy and heartbreak of earning their own paycheck (usually through a fast food or other retail establishment). The joy comes as they suddenly don’t have to ask their parents for money to buy their favorite things. The heartbreak comes when they find out they don’t actually get a sizable portion of their earnings.
Nope. Much to their chagrin, they have to give sometimes almost half to the government in the form of payroll taxes and withholding. Sure, they can get some and maybe even most of it back in the form of refund, but the immediacy of the taxes can shock them.
This is where the Child IRA really helps. It might even be easier to convince kids of the advantages of the Child IRA since they’ll see it as a way to get “their” money back from the government.
Of course, some parents like to create a “401(k)-type” incentive by matching their child’s contribution. Whatever it takes to get them to start, parents are in a great position to make sure children make contributions consistent. Once this savings habit takes hold, the kids are more naturally inclined to continue saving into adulthood.
Pre-teens: Babysitting, delivering newspapers, mowing lawns, these are a few of the traditional small-time jobs kids do to earn bubble gum money. If they’re dedicated, they’ll have much more to chew on.
Their earnings may still be well below the threshold for significant taxes. That doesn’t mean there’s no advantage to establishing a Child IRA.
In this case, with no need for a tax deduction, a Roth IRA makes an ideal choice. Think about it. The kids pay virtually no taxes on their earnings. The Roth grows tax free. By the time they retire, they’ll have a tidy little nest egg that came to them almost tax-free. What parent wouldn’t want that for their child?
Special situation: Parents who own their own business: OK, this is where the accountant comes in. Mind you, I’m not an accountant, so I can’t give you the definitive answer on this, but at least I know the right questions to ask.
For parent who are the sole owners of their own business, hiring your children may be a way to transfer wealth to the next generation without paying any (of very little) tax. It all depends on the prevailing payroll tax laws and may differ from state to state. That’s why you need to talk to an accountant on this.
There’s an added bonus here. As long as the job isn’t dangerous, many states allow parents to hire minor children at ages well below the established child labor laws.
Remember, these-parent owned businesses need not be full-time operating in large office buildings (although it works best if they are at least profitable). They can be seasonal, or side businesses run out of the home. For many financial advisers, this “special” situation, rather than being rare, represents a significant number of their clients.
Hopefully, these four examples match at least a few people you know. So, the next time you run out of things to say (because you’ve said everything you need to say) about what clients must do for their own retirement, switch the topic to the “new” generation. I say “new” and not next, because this discussion will work with grandparents as well as parents.
And remember, the clock is ticking.
READ MORE:
This is like a turbo-charged Child IRA — Carosa