Ds2 was able to graduate with no debt, which has given him freedom to make career choices some can’t. He quit his job about 18 months ago to pursue a creative ambition. After a year off, he had a random, decent-paying job for several months that he quit to take another that starts in earnest this week. It’s a contract, four-month gig but heavily supports his creative ambition so it’s a good move professionally. He never asks us for money, and the reason he has been able to make his choices is that he’s an excellent saver while working. But …
I have this nagging mother thing going on. With his first job out of college, he fully funded his 401k, but he hasn’t put anything else in savings since he quit there 18 months ago and, of course, has been spending down his liquid savings in between jobs. I’m considering opening up an account for him as he is losing out on the compounding that happens when you are young and the money works for you.
Bad idea or no? How to go about it? Is it even possible? Tell him or don’t? Clearly, I’m just in the thinking stage … Oh, and I would adjust any inheritance accordingly (thinking of that other thread)!
I think you can only put into an account less than the amount he actually earns. But that’s a great gift. We have done that for our DS as well…part of his Christmas present each year is a contribution to his retirement account. We give him the money…and he makes the deposit.
I would not worry too much about retirement and compound interest at his age. I would help with rent or other expenses first before thinking about funding his retirement account. It is a personal choice of course.
You can fund an IRA up to the amount of earned income (subject to IRA contribution caps). Did that with my son when he was in high school and college. He has always been a good saver so that wasn’t the issue. He knew about the accounts but had no access to them. When he graduated college, I gave him the login info which he has changed so he is in control of the account at this point.
My understanding of the laws / rules related to IRAs and 401k’s is that the money put into these retirement funds has to come from the money earned by the person whose name the funds are in.
However, the money that the same person uses to pay rent and to purchase food could come from the parents.
There is a limit regarding how much a parent is allowed to give a child each year. There is also a limit with regard to how much any particular parent can afford to give to their child. Up to these limits (whichever is smaller), I do not see anything wrong with a parent encouraging their child to contribute to an IRA, 401k, or 403b.
If you do the math, it is a really good idea for a person to start funding their own IRA, 401k, and/or 403b as early as is feasible. To me this makes it look like a very good idea for parents to encourage their children to do this.
Exactly correct. This compounding can be a really big deal if someone in their 20’s puts away money for retirement starting 40 years later.
Or help all children the same amount, or use this to offset significant differences in the education costs of each child.
If you can afford it, I think that this is a really good idea.
Pros: Compounding works. It’s crazy how important it is. We started in our 20s stopped in our late 40’s. Just let it grow and never borrow against it. Likely won’t add and will retire early. Still trying to diversify outside of fixed retirement funds. But the early factor is so crazy important.
Cons: I’m a huge believer in letting kids fly. They have to learn how to save for retirement. Maybe you can do a little savings in another vehicle and then gift it at a much later date. I personally wouldn’t mention it until he gets his retirement plan going. Also, he can’t really save in his retirement plan until he has earnings. One thing I wished we had done is have more variety outside of retirement accounts. Having long terms stocks which can be used/borrowed against can be very useful esp as kids want to buy a house etc. Maybe that’s the gift I’d give him. Though at this point, I like the idea of kids doing their own planning.
We started Roth IRAs many years ago for our kids, and a verysmall amount is deposited by us every year. We didn’t want to miss the chance to get them started, when so many employers have lousy benefits.
My parents did the same thing for me, that’s where we got the idea. I understand the notion that kids need to do a lot of things themselves, for themselves — I just think saving money when they could just make the rent was not one of them.
Can you clarify what you mean by this? On its face, this is not an accurate statement. If you are referring to the gift tax, there is no limit- just that after a certain amount, the PARENT needs to file a gift tax form (which will take under ten minutes). And unless your eventual estate is extremely large, you can file the form and forget about it.
What are you referring to and what limit are you referencing???
I’m a huge fan of Roth IRAs, as early as possible. He can contribute up to his earned income or $6000 a year - whichever is less - if his MAGI is <$144,000 (and he files as a single) for 2022 (the 2021 contribution window just closed yesterday). You are allowed to gift him up to $15K a year without worrying about gift taxes. He should open up a Roth IRA on his own since he needs to provide his SSN and personal info and establish his online account login.
What is your relationship with him like, i.e. would he be receptive to you getting him jumpstarted on a IRA? I opened a custodial Roth IRA for my kid as soon as they got their first W-2 at 14 years of age. Funded it with the amount shown as wages earned on the W-2, showed them how to buy mutual funds in the account with reinvestment of dividends, and got the clock started on the whole compounding thing.
Roth IRA contributions are not tax deductible, but the trade-off is the earnings won’t be taxed when they’re withdrawn after 59-1/2 years of age (as long as the Roth has been open 5 years). You can withdraw the actual contribution at any time without penalty or taxes, and for a young person that could be attractive. Ideally, they would keep the money in there as long as possible to grow the most, but it’s accessible if needed.
Another option is I Bonds which are yielding an annualized 7.12% for purchases between Nov2021-April2022. Next month the variable rate (based on inflation) readjusts and Bogleheads (another forum) posts indicate it will be over 9%. Max $10K in annual purchases per SSN, have to hold it for 12 months, will be assessed a 3 month interest penalty if redeemed before 5 years. I would read the threads on Bogleheads if you’re interested in this option. Prior to the Nov2021, the variable rate had been around ~3% so it wasn’t very exciting, but for a staid savings vehicle it’s pretty attractive right now.
@blossom we had to complete the gift form this year. I read the directions multiple times. We had given gifts on many different dates, and each gift had to be listed separately. In addition, my husband and I were splitting the total amount. Believe me…just what I just wrote took way longer than 10 minutes. I have no idea how long it took to complete it because our financial planner did it for us. Even he agreed, it’s not an intuitive form. But your point is well taken…in terms of gift giving. It’s just filling out a form.
I’m not talking a lot of money. Definitely no more than $10k/year, and maybe only a couple of years. I just know that so many of the choices we have been able to make is because I funded my 401k fully from the first moment I could, and I invested aggressively and continued to do so. Like I said, we are big savers.
I’m pretty sure he’s already got a Roth going – at least we’ve told him he should – in addition to his 401k from the first post-college job. We’d likely give him $6k/year as mentioned above with the stipulation that it go into the Roth or open one if he doesn’t have one going.
I am personally opposed to paying for his monthly expenses, though my mantra is if you can’t afford to save then you are living beyond your means. In that sense, I do think he’s living beyond his means even though he’s really frugal, but this retirement savings thing is my issue. lol He’s actually doing fine, though I do think choosing this unconventional route he doesn’t quite get how much he could be losing in terms of savings/future earning power. Of course, if he hits it big I can one day laugh about my concern. He knows people whose parents are basically supporting them while they pursue their dreams (acting in NY and LA, music in places in between). He is 1,000% opposed to this, which is good because we can’t afford to do that anyway.
My relationship with him is excellent. We can talk about anything. I think he would be touched to hear we want to fund a little retirement savings for him.
I’ve been avoiding Bogleheads as I know it’ll be another rabbit hole, though I’m sure a useful one.
Ds1 is in such a different place financially, in part because he married well. I think they are a little embarrassed having bought a house when so many friends can’t afford to. But we got ds1 a bachelor’s and master’s with no loans so he was set up well by us, too. I definitely will consider his feelings. Thankfully, they are close, and we are all pretty communicative.
Nope. The IRS does not track every specific dollar to make sure that the exact dollars being earned by the retirement account owner are the same exact dollars being contributed to the account(s). Money is fungible. As long as the rules are followed, like not exceeding the annual limits and not contributing more than the income earned for the year, it’s all good.
Nope again. As already explained, the limit has to do with how much can be gifted in any one year before gift tax reporting requirements kick in. A parent could, if they wanted to, give their entire net worth to a child all at once. Not recommended, but there’s no rule prohibiting it.
I was just referring to the gift tax. I will admit that I am not up to date on the rules regarding the gift tax. My accountant at one point said something similar to what you said – that it is not a big deal.
Regardless $15,000 from me plus $15,000 from my wife will exceed what any one child will be putting into their 401k this year. Again, my accountant did not seem to be concerned even if we did pass this.
Which I guess means that it is only a reporting requirement, and even then only if it exceeds $30,000 per year. One child is not going to be putting $30,000 per year into a 401k.
Which I guess means that we can ignore the gift tax issue, and just support our children and encourage them to start their 401k’s.