Absolutely do it. Every amount you can transfer from your own taxable accounts to their tax deferred accounts will reduce family taxes on investment earnings and leave more for them some day.
Obviously income accruing without taxes will work out to huge figures over a lifetime due to compounding.
I have used my funds to max out every available tax deferred option for my daughter since the first dollar she earned.
I do wish I’d thought of doing that earlier. My DD has been working since she was 13. She didn’t start her retirement savings until sophomore year of college. But with some lucrative internships that allowed Roth 401k summer contributions, she is well on her way.
We have also urged S to contribute max (or at least significant amounts) to his various tax advantages accounts and he has. We have been happy to give him money to do so as well, up to the max per person gift per year from H and me.
Wish D was earning money/income so we could fund accounts for her as well.
I’ve been refraining from gifting my kids money, they get the usual Birthday and Christmas and that’s it and that money I invest in the stock market for them, they don’t get to spend buying trinkets, they told their friends, my husband and I gifting them VTI shares.
One of my kids is in creative field but she seems to be doing alright, not particularly frugal nor a big saver, but she does contribute to her Roth IRA ever year and has been financially independent from us. The other kid has a well paying career and her company just went public, so she has far more money than my husband and I at that age.
I’m a firm believer in letting my kids fly on their own. Why? My husband and I did. My FIL and my father did, it really didn’t hurt them, actually the opposite happened.
If you ever inherit money, that could be a good time to consider sharing your good fortune. Spending out of your own savings seems a bit riskier. Perhaps just better to make sure your own 401k/IRA names your kid(s) as secondary beneficiary.
The problem with children inheriting an IRA vs helping to fund theirs is the distribution timeline.
Most recent SECURE Act requires depletion of non-spousal inherited IRA within 10 years, and depending on the amount, could cause a hefty tax burden.
This is kind of what we did. My H inherited some money when his father died a couple of years ago. The funds are held in a trust with D as the subsequent beneficiary when H dies. We contributed to D’s Roth IRA using those funds. We felt it was in the spirit of what her grandfather would have wanted rather than waiting until H died. D is a good saver but there are probably other things she will be saving for - like a house - that we also wanted to encourage.
We are too. Without the second job I had in my early twenties, I might not have jumped to my own business or done a lot of things. The notion that my parents are there in case a kid needs them can be a benefit and a curse (in the context of making it on your own). Knowing that you have to not only pay the rent but save for retirement is hard. And that can make you focus more.
Our kids will be set up financially unless there is crazy inflation and we end up eating cheerios. But we’re not planning to support them/their retirement. They did start work at 15. Saved most of their money. The oldest wanted and got bitcoin as a birthday gift. One kid used some money given for Xmas to buy a stock which has done well. We try to pass on our frugality and investment strategies rather than gifting them a lot.
My sister has kids who have a great education and zero debt. They are in their 20’s and don’t hold regular jobs. Rely on Mom and Dad to fly them around and the 27 year old just started working more to pay the rent completely. Not what I want my kids’ path to be. I’m not saying anyone here has kids like that. I’m not saying they are bad kids. All I am saying is that is not what I want in my kids. Adhering to your income and paying your bills is HARD. I want my kids to learn adult skills. I want them to work hard and have the confidence that they can do it. Nothing like getting a paycheck when you are young.
When my kids are 30 I want them to make choices as we did. I wouldn’t take away their ability to navigate their financial life because I was worried about their retirement. We learned a lot about investing over the years. I’m not sure we’d be where we are if someone put a retirement plan in place for us. YMMV.
Someone else can clarify…but this applies to Inherited IRAs only. Our financial planner told us any balances in our retirement accounts to our beneficiaries can be rolled over to other tax deferred retirement accounts. I believe there is a difference.
I received an Inherited IRA from my mom. I think this is a different product than a regular IRA.
Everyone’s philosophy is different. I grew up poor and struggled a lot and don’t think struggling is required to build character. It breaks more people than it helps. Now that I’m in a position to help, I help family members struggling and will smooth my kid’s way through life as I am able, including financially. I’ve raised her to be a wonderful, kind, hard-working person and a little help from mom isn’t going to change that. She wants a career that won’t pay much but is a great benefit to society and I have made sure she can make that choice without worrying about finances.
To each their own.
That says a lot about her and about you. A great kid. Yep, you know what’s right for you and your family.
I think it really depends on the kid. I have known kids of “corner office” parents who have done incredibly well. And others who dropped out of high school and have never been employed in anything other than part time/non-career jobs. And everywhere in-between. Some can handle being fortunate without becoming spoiled/entitled. Others cannot. You know your own kids better than anyone else and can better determine what works for you and your kids. Won’t work for everyone.
Nope. A quick google shows that the secure act 10 year rule applies to non-spouse 401k beneficiaries as well.
Great discussion. Many years ago I read a WSJ article that said basically: “Want your kids to retire millionaires? Do this”. And the “this” was to have them invest all of their earned income into a Roth IRA (and simply reimburse them for the earned income). My plan is to do this for both of my kids until they graduate college with the promise that they continue to contribute the maximum they can into the Roth IRA. So for my oldest, who worked retail as a Junior and Senior in HS, that was $2K one year and $3K the next.
We’re fortunate to be able to do this without any significant impact to us as parents. Even if it was a minor impact I would still proceed - the power of compounding is so great and they’ll never get these years back. Note that part of this is learning about finances and investing and also the promise to continue to contribute post graduation.
I’m always surprised at the lack of financial education there is in our school system - some good decisions and investments early in life will make a huge difference later.
We have always encouraged our kids to save in tax advantages accounts. It has served S very well as his accumulated assets and net worth are much higher than ours was at a similar age.
We continue to support D and will likely have to until her MDs can help her get better control over her chronic health issues. So far there wasn’t been much progress in the past few decades.
If you are named as a non-spousal beneficiary of an IRA and it’s owner dies, it’s an inherited IRA and the 10 year rule applies. The government wants its money.
However, there are exceptions to the 10-year rule for certain types of beneficiaries:
Agree about financial education. I took a class in HS called financial literacy. We learned how to balance a checkbook, make a budget, all kinds of things.
DS2 is really good about money, but something he said a few months ago got me a little worried. He talked about having enough money to pay cash for a little house. This was when interest rates were low. I certainly understand the thinking of wanting to remain debt-free, but I explained how with interest rates below 3% (he has an excellent credit rating) that would be a bad idea when he can take so much of that money and make more in some other financial vehicle. He definitely had the “all debt is bad” mindset, which he no doubt got from me but without the nuance, you know? Anyway, that’s what got me started thinking about this … does he really understand the value of early investing and what he’s losing by not doing it now that he’s not employed in a normal job with the structure to make that easy?
He’s a hard worker. When he got an internship before senior year in the city where he now lives he had to get a second job as a dishwasher to afford the COL there. But making it work at that low-paid internship led to a real job that led to his current enviable gig. He marvels how we have been able to do so well on our salaries and lack thereof at times. The well-funded 401k in our back pockets is how.
We will need to keep an eye on this. Might be better for us to withdraw more than the 4% we are currently withdrawing, pay the taxes and gift to our kids while we are alive.
That!
Until kids actually earn a living where THEY have money left to fully fund their tax-deferred options themselves, I gladly treat them as MY tax shelters.
NOT making use of every single advantage the law allows a family to take, is essentially leaving money on table - or rather: you’re making donations to the IRS instead of keeping it in the family…
All inherited retirement accounts (IRA< 401, 403, etc) are classified by spousal or non-spousal. You can rollover an inherited spousal into your own, but non-spousal cannot be merged with yours. The distribution requirements differ - RMDs over your lifetime for yours and spousal, 10 year rule for any non-spousal.