I’m watching my ten-month-old daughter crawl around our den. She’s still getting the hang of it, and occasionally she’ll fall flat and flail her limbs like a turtle flipped on its shell. Once she gets going, she inevitably makes a beeline for one of three items in the den: a chair, an empty oatmeal canister, or our TV remote. She rarely motors toward her tubs of toys and books. It’s one of those clichés about children that turn out to be true: they play with the wrapping more than the gift, the box more than the toy.
I think a lot about how I’m going to handle my daughters’ financial lives. As parents we walk a tightrope: we want all the opportunity of the world laid at our childrens’ feet, but we also want them to know and understand hard work. In our lives, we’ve all known someone whose parents spoiled them into a demotivating stupor. I once listened to someone explain their upcoming vacation plans, which included flying to where their adult daughter lived, looking at cars with her, and then buying her a car (you can probably guess where I stand on this). At the same time, we’ve all also known people with great potential that just needed a few more resources to be successful.
That’s why I’m interested in ways that we can have it all: ways to help out our children without ruining them. Every child is different, so no list can be definitive. But I’ve compiled an E.A. Mann-approved list of ways you can give to your children.
1. Backdoor their Roth IRA
A Roth IRA is a retirement vehicle on steroids. A dollar invested in this account will never again be taxed as long as its owner is 59 ½ years or older when they remove their money. But there’s a catch: only income earned from work can be invested into a Roth IRA. So when your child gets their first teenage job, have them put all of their earnings, up to the $5,500 limit, into their Roth IRA. Then gift them that amount from your funds. This is a legal way to kick-start their nest egg, and because it’s untouchable for decades (and because they had to work for it), it’s unlikely to ruin them.
How much will this help your child? Here’s a stat so crazy I triple checked my math because I didn’t believe it: if you were to max out your child’s Roth IRA from ages 16-20 and then never touch the account again, it would grow to almost $750,000 by age 60 with an 8% yearly return. Even with inflation factored in, this is an astounding amount of money. In short, when youth and compound interest mix, magic happens.
3. Fund their 529
College debt is stunting the growth of a generation, saddling them with house-size loans without the benefit of actual houses. A 529 is like a Roth IRA for college. Similar tax rules apply, but the money can be withdrawn at any time without tax or penalty as long as the cash is used for educational expenses: tuition, books, room and board. I don’t expect to be able to fully fund my daughter’s college bills, but I want to help. And for this scenario, a 529 is your best friend. Plus, though the child is the beneficiary of the account, you control it, meaning they cannot raid the account, even when they reach legal age.
Each state has their own 529, but you are not restricted to your state’s plan. You can pick any plan that does not have residency requirements. Though I live in Rhode Island, I use Nevada’s 529 plan, because it is serviced by Vanguard and has very low fees. There can be benefits to using your own state’s plans, but I personally found my state’s benefits complex and mostly not applicable to me. In the end, do your research, but my advice is to ignore which state owns the plan and instead focus on the investment company, the funds and the fees.
(Note: When researching the differences between 529 plans, I suggest using this free tool from Vanguard. It is especially useful to see which plans require you to be a state resident to use them.)
3. Match funds for important purchases
Like those mysterious rich people who offer to match donations made to Public Radio, help your child by matching their savings toward important purchases, such as a car or a bike. In this case, your help is contingent on their ability to work and save.
4. Provide a modest allowance
Giving children an allowance will help them understand the value of money and to learn to save for purchases. Ideally this allowance will be contingent on household participation. I don’t like the idea of ‘chores’, per se, because chores sound like a specific set of jobs that can be done or not as money is needed. Instead, stress that they are part of the household and have to chip in the same as the adults. For example, when dinner’s done, the whole family cleans up. Don’t want to help? Well…there goes the allowance.
5. Finance dependent-care spending accounts
Some workplaces offer these accounts as a way to defer the cost of raising a child. It allows pre-tax money to be allocated for childcare; at least, this is how most people use them. But these accounts can also be used for nonstandard childcare such as summer camps. Use these accounts long after your children are in school, and you’ll get a discount on activities that challenge and enrich them (and get a parental break in the process).
6. Buy term life insurance
Purchasing a term insurance policy can be cheap. A healthy thirty-year-old may be able to get a $250,000 term policy for as little as $30 per month. For this, we get peace of mind that if we die early, our children’s food, clothing, shelter and education will be provided for. Avoid whole life insurance in this scenario, which is more expensive because it adds an unnecessary saving/investment component. In this case, you only want to insure a payment to your child in case of emergency. Speaking of emergencies…
7. Establish an emergency fund. I don’t plan on supporting my daughters into adulthood. However, if they find themselves in a bad spot — an abusive relationship, say — I want resources ready to get them out of the situation and back on their feet. In no world would this be considered spoiling a child. If you decide to create one of these “dependent emergency” funds, you wouldn’t know when you’d need this money. Therefore you’d either need to keep it liquid (savings account) or put it in very conservative investments. And the good news is that if your child doesn’t have an emergency, you can keep the money for yourself or gift a portion of it for their wedding or first home purchase.
Will any of these methods of financial assistance guarantee us a secure, well-adjusted, hard-working, unspoiled young adult? Oh, that it were so! But at the very least, we can avoid the most common pitfalls of spoiling our children and instead deploy assets in a way that does the most good. My daughter’s opinion on all this: more empty oatmeal canisters, please.
Written by E.A. Mann. The views expressed represent the opinion of the author and are not intended to reflect those of FutureAdvisor or serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities. Past performance is not indicative of future results.