Setting Up Our Kids For A Successful Retirement
By Eric Brotman
When you have a baby, it’s hard to imagine that baby retiring from a 40-year career. But it’ll happen.
If you’ve already figured out your retirement plan and have all of your financial ducks in a row, there are ways to start setting up your children for financial independence from the time they’re born that are both tax-smart and financially savvy.
Open a college fund.
A college education is one of the most expensive purchases you can make, and it’s probably going to be even more when your baby turns 18. College tuition has more than doubled in the past 40 years.
As soon as your child is born you should start saving for their college. Whether it’s a basic savings account or your state’s 529 College Savings Plan, putting away a set amount of money each week or month of your child’s life will give you a good financial cushion when those tuition bills start rolling in. Plus, your state may have tax incentives for using their plan that could reduce your state tax bill.
Keep in mind that you want these accounts in your name, not your child’s, so they don’t affect their financial aid options down the road.
It’s never too early for life insurance.
Taking out a life insurance policy for your child may sound morbid, but I assure you it isn’t. A juvenile whole life insurance policy will have a death benefit, a cash value that is contractual and a premium that can never change. The younger you are when you get it, the lower the payment is.
The big reason to have life insurance coverage for your child is not in the event your child dies before you do, but because it creates an asset your child can use later in life and can protect his or her insurability.
I bought my daughter a $250,000 whole life policy a month after she was born. It has a guaranteed insurability option on it which says that between the ages of 25 and 45 she can qualify for more life insurance without any medical underwriting.
None of know how healthy we’ll be later in life, but we can assume we won’t be as healthy in our 40s as we are in our teens. If you wind up with weight issues, diabetes, a melanoma or anything else, you can still qualify for greater life insurance without health being a factor.
Fund a Roth IRA.
When your child gets his or her first job and is making taxable income, they can contribute to a Roth IRA. A minimum wage job at a fast food joint may not be enough for your kids to fund a retirement plan, but as parents you can actually make contributions to that Roth IRA on their behalf from your own money.
Contributions to Roth IRAs are limited to the W2 income earned that year with a $6,000 cap. If your child makes $3,000 in the summer at a part-time job, you can take your own $3,000 and put it in a Roth IRA for your child and it will grow tax-free for the rest of his or her life.
You can even wait until the W2 comes in the mail, so you know the exact amount before you fund the account, as long as it is made before April 15 of the following year.
Involve the grandparents.
Without having to outright ask your parents for money, find out if they are intending to do anything financially for your child. If so, you can coordinate with them to find the most effective way.
We all want our children to be successful in the future, and there are creative and tax-efficient ways to help them from the time they are born. But remember, make sure you’ve figured out your own finances and are prepared for financial independence yourself before helping your child.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regards to your individual situation. Comments concerning the past performance are not intended to be forward-looking and should not be viewed as an indication of future results.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Brotman Financial Group, Inc. and BFG Financial Advisors are not affiliated with Kestra IS or Kestra AS.
There is no guarantee that the plan will grow to cover college expenses. In addition, depending upon the laws of your home state or designated beneficiary, favorable state tax treatment or other benefits offered by such home state for investing in 529 college savings plans may be available only if you invest in the home state’s 529 college savings plan. Any state-based benefit offered with respect to a particular 529 college savings plan should be one of many appropriately weighted factors to be considered in making an investment decision. You should consult with your financial, tax or other adviser to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances and also may wish to contact your home state or any other 529 college savings plan to learn more about the features, benefits and limitations of that state’s 529 college savings plan. You may also go to www.collegesavings.org for more information
All guarantees are subject to the claims-paying ability of the issuing insurance company. Guarantees do not apply to the investment performance of any variable accounts, which are subject to market risk.
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