I enjoyed Carrie Schwab Pomerantz column Teach Kids About Building Wealth. She starts with:
"As a parent, there's no end to the important lessons you want to instill in your kids. You try to teach them about life and give them the skills they'll eventually need to be independent adults. It's easy when they're young. You teach them to look both ways before crossing the street and to study hard. But as they become teenagers, the issues can become more challenging: The birds and the bees is a topic that comes to mind, or the dangers of drugs and alcohol.
But right up there in difficulty level is talking about money. In fact, a survey of parents sponsored by Schwab revealed that most parents feel more comfortable having the sex talk than they do discussing finances. To my mind, money - and how to manage it - is one of the most important talks you can have with your child. And the sooner you have it, and the more open you are about managing money, the more prepared your child will be when starting to build wealth when he or she becomes an independent, working adult. "
Janine and I talk frequently with our daughters about money. I read The Richest Man in Babylon to them. They have an allowance. We let them buy books, toys, clothes and so on. They are learning to make choices and to save money.
Currently my oldest daughter is reading Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money--That the Poor and Middle Class Do Not! I ask her to read a couple minutes every morning. A few times I've caught her still reading a half hour later! My second daughter is saving money to fly back to Virginia and see her cousins. My youngest is saving money to buy stuff for a remote control plane.
Carrie Pomerantz continues in her column by making the point at we should encourage our children to take advantage of 401k plans. If children learn the habit of saving now, it will pay great dividends down the road.
There are months when my 13-year-old makes almost $200. I think it may be time to look into opening an IRA for her.
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5 comments:
Your child needs to have earned income that is declared to the IRS in order for her to open an IRA. That would mean paying any income and payroll tax due.
The hassle probably outweighs the tax savings at this point...
I think the main benefits of an IRA are tax advantages (deferment or payment at an earlier and hopefully lower rate). That and the penalties that prevent most people from taking it out until much later.
But you could probably still invest the money for long term gains.
You will also want to look at how college aid formulas are calucated. We tend to avoid putting large sums in the children's own names since colleges assume that they will spend most of their savigns on college but assume parents will spend a smaller percentage of their savings. (This method of course, hinges on being able to keep children's long term money from being spent on mom's new car or dad's new boat.)
"The hassle probably outweighs the tax savings at this point..."
Thanks for the explanation. It does sound like it is worth waiting a bit.
"We tend to avoid putting large sums in the children's own names since colleges assume that they will spend most of their savigns on college but assume parents will spend a smaller percentage of their savings."
Maybe we'll have to look into ways to hide some of the money. Ugh!
Henry,
Open a Roth IRA for your daughter. That's what I did for my 16 year old daughter. She made money giving piano lessons. Even her babysitting money counted toward the IRA contribution since it is earned income. Many times a child can have earned income yet not need to file a tax return such as working in a family business.
Also, if they owe taxes (ie income tax or self employment tax), the student should be filing tax forms anyway. It's no additional hassle.
The Roth has no tax deduction advantages, but your daughter doesn't need any tax deductions. The real advantage is the growth and tax-free withdrawals. Roth IRAs can even be used for college expenses without paying an early withdrawal penalty.
Roths and IRAs are NOT considered in the FAFSA (financial aid) calculation, so put that fear to rest.
HTH,
Carol Topp, CPA
www.CarolToppCPA.com
Carol, thank you for the advice!
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