Planning Opportunities with Children and Young Adults
With summer in full swing, many young adults are looking for or have just started their first full-time job, and many in high school and college are working part-time jobs for the summer. While the majority of their earnings may go towards daily expenses, there are a few little-known saving and planning strategies that present opportunities for families with children in this stage of life. And with plenty of life expenses to come, saving and investing early can have a huge effect on the success of building long-term wealth.
One powerful opportunity available is saving into a Roth IRA for a child from an early age. In fact, I have first-hand experience with this, having had my own Roth IRA since I was about 12 years old. I began mowing lawns in my neighborhood that summer, and my dad and grandfather took the opportunity to teach me about investing, the power of compounding, and taxes. We opened a Roth IRA to save into and my grandfather began teaching me about investing. When it came time to file my taxes, my dad (a CPA) wouldn’t just file them for me, but would actually show me what he was doing. This continued through high school and college as I worked more and more. The experience not only provided the financial benefit of saving from a young age, but it introduced me to the concepts of saving and investing early on to set me up for success once I began working full-time. And considering the early exposure to these areas, it’s not too surprising I’m now a CPA and financial planner.
Practically speaking, there is no minimum age to open an IRA, the child simply needs to have earned income (i.e. wage or self-employment income). And the source of funding for the IRA can come from anywhere. So, if the income the child earns is used for their spending, a gift could be made to the child to save into the account (up to $6,500 for 2023). Alternatively, more creative options exist such as implementing an “IRA match” where a parent or grandparent matches what the child saves up to the maximum allowed contribution.
If the child is still a minor, a custodial IRA can be opened and then transferred outright to the child once the age of majority is reached. And while saving into an IRA does generally merit filing a tax return as best practice to substantiate the earned income, having the standard deduction available to children equal to their earned income plus $400 (as of 2023, up to normal limits) allows for actual taxes due to be mitigated. Given the long-term benefit a Roth IRA provides and the limited amount that can be contributed per year, every year that a young person can save funds into this account is significant. All of this can be a great way to give not only a financial gift to a child or grandchild, but also the gift of financial education.
Another great planning opportunity centers around families with high-deductible health plans (HDHP). As you may be aware, when a family has a HDHP, they can save into a Health Savings Account (HSA). The maximum for 2023 is $7,750 per family, and $1,000 more for each spouse if they are over the age of 55. An HSA is a highly tax-advantaged account currently, allowing a tax deduction when contributing, tax-deferred growth, and provided the money is used for qualified medical expenses, tax-free withdrawals. The planning benefit here lies in that once you have a young adult child who is claiming themselves on their tax return, but still on the family health plan, they can also save into their own separate HSA account up to the family max. This could enable each adult child on the family plan to save $7,750 into an HSA. Similar to a Roth IRA, the funding source doesn’t matter. Therefore, a gift from parents or grandparents can help fund the account, making it another great financial and tax planning option.
A big benefit with an HSA generally lies in keeping the funds invested until retirement and having a pool of funds specifically for future medical costs or to reimburse past medical costs. But if the child needs to access those funds for medical expenses before that, they can.
This opportunity only exists for perhaps a handful of years since the child can no longer be claimed as the parents’ dependent, which generally means they are providing over half their own financial support. The sweet spot exists between getting a full-time job and the year they turn 26, as that is when children can no longer be on parents health plans.
These are a couple of simple, but powerful, ways to help get your children or grandchildren on good financial footing to start their careers; and more opportunities like this exist. Custodians such as Fidelity, Vanguard, and more have great options for opening custodial IRAs or Health Savings Accounts online. If you have questions about pursuing one of these strategies, please don’t hesitate to reach out.
Matt Parks, CPA
Financial Planner
