Caring for Dependents

Saving for College? Here are 5 Accounts You Can Start Using Now

by Merriman | Jul 20, 2021 | Caring for Dependents, Goal Planning, Tech Focus, Wealth Transfer

It’s true what people say about having kids: the days are long, but the years are short. Sometimes our busy, ever-changing lives leave us wondering: “Where did the time go?” When it’s time to send your child off to college, you may feel sentimental, but there’s no need to feel unprepared. With so many options to save for your child’s future, you’ll be able to find the one for you.

Invest in a 529 Plan

When saving for your child’s future, 529 Plans are a popular choice. These savings accounts offer tax advantages similar to a Roth IRA. When your child is ready to go to college, you can make tax-free withdrawals to pay for qualified education expenses.

Benefits

You can open a 529 plan as soon as your child is born. This allows the money to grow over a longer period of time.
The funds apply to both undergraduate and graduate programs at any two- or four-year institution.
They allow up to $300,000 in lifetime contributions.
If your child doesn’t go to college, you can change the beneficiary.
Some K–12 expenses may qualify under the 529 plan, such as tuition and fees.

Drawbacks

Any funds not spent on qualifying expenses are subject to income tax and a 10% tax penalty.
You are required to report withdrawals on the FAFSA if the account is owned by someone other than the parent. This could negatively impact the student’s eligibility for financial aid.

Consider a Roth IRA

Roth IRAs are typically used for retirement savings, but you can also use them to save for your child’s future. You can’t take distributions on Roth IRAs penalty free before 59½. However, any account open for at least five years can be used for education, so make sure you open the account no later than your child’s 8th grade year.

Benefits

Distributions are tax free and penalty free as long as they are used for qualifying education expenses.
After graduation, the account can still be repurposed as your retirement account.
The value of the retirement account is not included in a FAFSA application.

Drawbacks

Roth IRAs have annual contribution limits of $6,000. An average year at a university can cost upwards of $20,000. So, it would be difficult to save enough money with a Roth IRA account unless you start early.

Remember, any withdrawals from a Roth IRA are considered income, which will be reported on a future FAFSA. This might impact your child’s chances for financial aid.

Coverdell ESA

A Coverdell Education Savings Account (ESA) is a great alternative to a 529 plan. It is a tax-deferred trust account with high potential for growth.

Benefits

Savings can be used for primary and secondary education as well as college.
There is more flexibility in what is considered a “qualifying expense.” Parents can use the funds to pay for school uniforms, tutoring, and other K–12 programs.

Drawbacks

Annual contribution limits are set at $2,000 per person, per year.
You also cannot make contributions after age 18. All funds must be spent before the beneficiary turns 30.
There are also income limits on who can contribute to a Coverdell ESA account.

Custodial UGMA/UTMA

Custodial accounts are another great way to save for your child’s future. With a Custodial UGMA/UTMA, you have the ability to transfer assets to your minor children and enjoy tax breaks.

Benefits

When the assets are transferred, a portion of the value of the assets is taxed at the child’s tax rate, and the rest is taxed at the parent’s tax rate.
Since this is only a transfer of assets, there are no restrictions on how the money should be spent, other than the benefit of the child.
A custodial account allows any asset (not just cash), such as stocks, bonds, art, and real estate, to be transferred to a minor.

Drawbacks

Since the assets are owned by the child, parents have less control over how the money is spent.
These accounts will have to be reported on a FAFSA, so there is a chance for them to negatively impact financial aid.

Savings Bonds

Savings bonds are issued by the US government and can be purchased from a financial broker or directly from the US Treasury. They may be a good option for more conservative investors, at least for a portion of your investment strategy.

Benefits

Bonds are low-/no-risk investments since they are backed by the federal government.
If you invest in Series EE or Series I bonds, interest earned is tax free when funds are used for qualified education expenses.

Drawbacks

Incredibly low rate of return. You’ll need a backup savings plan.

When it comes to financial planning, you’ll also want to consider making sure you have your retirement accounts set up first. A certified financial planner will help you decide which account is the best option when saving for your child’s future. He or she can monitor all of your accounts and suggest any changes needed to secure a bright financial future for you and your family.

Written Exclusively for Merriman.com by Lyle Solomon

Lyle Solomon has considerable litigation experience as well as substantial hands-on knowledge and expertise in legal analysis and writing. Since 2003, he has been a member of the State Bar of California. In 1998, he graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, and now serves as a principal attorney for the Oak View Law Group in Los Altos, California.

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and it is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. . Facts presented have been obtained from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.

Summer Jobs and Loving Grandparents

by Eric Jonson | Jul 6, 2021 | Advisors, Caring for Dependents, Eric Jonson, Family Talk, Retirement Savings, Wealth Transfer

One of the great things I get to experience as a financial advisor is that many of my clients have achieved such good financial security that they are able to help their relatives financially. One of the best examples is grandparents wanting to help their grandchildren. The usual starting place for grandparents is helping to build an education nest egg, usually in a 529 plan.

When their grandchildren get older, my clients will often pose the question of how to help them out without just giving them money directly. Below is a typical conversation. Loving parents can be interchanged with loving grandparents with the same effect.

Client: Eric, our wonderful 20-year-old granddaughter just finished her second year of college and is doing very well. We are so proud of her. We want to help put her in a better financial position for after college, but her parents do not want us to spoil her. Is there anything we can do for her?

Eric: Does she have a summer job or work while at school?

Client: Yes, she is working at a local nursery tending the plants over the summer. She loves the job as she is a biology major.

Eric: Great! One way you could help her is to fund a Roth IRA for her.

Client: Really?! She can have a Roth IRA?

Eric: Yes. Since she has earned income, she can contribute to a Roth IRA.

Client: How much can she contribute?

Eric: She can contribute up to the amount of income she makes with a maximum of $6,000. Let’s say she makes $2,500 over the summer; she could contribute that amount to a Roth IRA.

Client: That is very interesting. Why would she want a Roth IRA?

Eric: There are a lot of reasons, but the big one is that she will have an account that will grow tax free; and by starting at such a young age, she will have extra years for it to grow until her retirement.

Client: I don’t think many 20-year-old kids these days are really that interested in retirement accounts.

Eric: That’s true, but I like to show the miracle that is compound interest and how small deposits made now can turn into large amounts of money in 45 years at retirement. If your granddaughter were to invest $3,000 for the next five years and earn 7% interest until age 65, she would have over $387,000.

Client: That’s amazing! But still, thinking about retirement is a difficult concept for young people.

Eric: True. Another great aspect of a Roth IRA is that it can help with a first-time purchase of a home. There are certain rules in place to allow contributions, including up to an additional $10,000 of a Roth, to be used for the first-time purchase of a home. A Roth account has a great amount of flexibility.

Client: That is wonderful!

Eric: I have helped many grandparents with making contributions to their grandchildren’s Roth IRAs. Some grandparents will match the contributions their grandchild makes to their Roth IRA to incentivize them to save money. Others will just make the entire contribution as a reward for working a part-time job. Either way, the grandchild will benefit. It ends up being a wonderful legacy that can be used by the grandchild to further their financial situation. Also, it can teach them the benefits of saving money. When they start careers down the road and can fund their 401k, they will have already experienced the benefits, and the education and experience can put them on a great path to financial security. I have received rave reviews from people who have put one of these plans into motion and have seen the benefits.

Client: What about her brother who is 16 years old and working at a grocery store?

Eric: Even better—more time to grow, although an adult will have to act as custodian on the Roth IRA until the age of majority.

Client: How do we get started?

Talk to your Merriman Wealth Advisor if you are interested in looking at Roth IRA options for your children or grandchildren. We can help with the custodial set up and investment recommendations.

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Nothing in this presentation in intended to serve as personalized investment, tax, or insurance advice, as such advice depends on your individual facts and circumstances. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.

Getting Creative with Financial Literacy

by Alan Hensley | May 18, 2021 | Alan Hensley, Caring for Dependents, Family Talk, Investing 101, Tech Focus

As a dad and a financial advisor, I find myself constantly trying to explain how money works. In my opinion; budgeting, investing, and creating income are topics that should be equally important to my 8-year-old daughter as they are to a 50-year-old client. Unfortunately, for whatever reason, access to financial literacy tools for money management are not a mainstream part of our educational system. With more and more resources available at our fingertips, it is my hope that the next generation will grow up already knowing how to save and plan for retirement way before they get their first job.

Take my daughter for example. Last summer, my then 7-year-old asked me what I do for work (I’m a financial planner). It turns out, her friends were all talking about what their parents did for a living, so naturally my daughter wanted to join in on the conversation. Up until this point I had always told her that I helped people get ready for retirement, which I summed up as a “summer vacation that never ends”. She didn’t give it much thought until other kids started talking about how their parents owned a restaurant, helped people get better as a doctor, or worked on getting packages delivered faster as an engineer at Amazon. When my daughter told her friends that her dad helped people get ready for a never-ending summer break, she got a lot of “Huh?” faces.

I then decided to have a more in-depth dialogue with my daughter around what I actually did. The basics of how investing works seemed like a good place to start. So, using the tools we had at our disposal (crayons, blank paper and a 7-year-old’s imagination) I set out to explain what a financial advisor does. It started with a simplistic explanation of what the stock market is, and by the end of our first conversation, my daughter had learned the rhyme: “Stocks make you an owner, and bonds make you a loaner.”

This was progress! After a few more arts-and-crafts sessions, we had created a story explaining how investing in the stock market works, and it was starting to resemble a book. At this moment, I told my daughter we should try to publish our book so other children could learn about investing, and she turned to me and said, “Dad, you can’t just publish a book. Only authors can do that!” Challenge accepted!

Fast-forward six months, and our rough draft was polished into a finished book. Today, you can find “Eddie and Hoppers Explain Investing in the Sock Market” on Amazon! As a dad and a co-author, I’m very proud of my daughter for helping me create this story and for helping me make the book a reality.

After the book came out, I figured my daughter would stay interested in financial literacy, but I should have known asset allocation and risk management weren’t exactly the most exciting topics for an 8-year-old. I had to find a way to introduce financial topics into everyday life.

Money management for a second-grader is pretty simple. My daughter’s main income sources are: A monthly allowance, gifts from relatives for birthdays/holidays, plus she had a lemonade stand last summer that netted a respectable profit. The problem wasn’t earning the money, the problem was keeping track of it and then remembering how much she had when she wanted to buy something.

So, as a dad/financial advisor, I did what comes natural… I created a spreadsheet to track everything. Turns out, spreadsheets are also pretty low on the list of things that my daughter finds interesting. This is when I had my a-ha moment. I did a quick internet search and found a lot of options for tracking how much a kid earns, spends and saves. Last summer when I was trying to teach my daughter what I did for a living, I did a similar search for children’s books that discuss financial topics and found very little. That’s what inspired me to write our book. Thankfully, this time I was able to find what I was looking for when searching for an app that could help me teach my daughter about budgeting.

Ultimately, I decided to use Guardian Savings with my daughter because it has the right balance of simplicity and effectiveness. Guardian Savings allows my wife and I to be ‘The Bank of Mom and Dad’. My daughter finally got organized, and she consolidated all her savings from the half-dozen wallets, piggy banks and secret hiding spots, so she could make her first deposit. More importantly, when we’re at the store or shopping online and my daughter finds something that she must have, we’re able to open the app and let her see the impact of making an impulsive purchase. Plus, as the parent, I get to decide what interest rate my daughter will earn in her account. Not only do I get to have a conversation about what interest is, but she gets to experience the power of compound interest by seeing her savings grow each month. Talk about a powerful motivational tool!

In this day and age, the idea of teaching your child how to balance a checkbook is outdated. The next generation will live in an entirely digital world. Apps are the new checkbook, and it may be a good idea to teach your children personal finance in the same environment they will be in as adults. Already a digital native, my daughter impressed me by how fast she learned how to use the app, not to mention the principals of saving and smart spending that are encouraged throughout the interface. In a few years, I’ll be able to discuss what asset allocation is and how a Roth IRA works, but for now I’m happy that my daughter can get practice making budgeting decisions and building a strong understanding of the basics. Financial literacy has to start somewhere and the sooner that foundation can be made, the more confident a child will be when it comes to managing money as an adult.

City of Tacoma Employees: Buy-Up Long-Term Disability Insurance Benefit

by Geoffrey Curran | Jan 13, 2021 | Caring for Dependents, Geoff Curran, Life & Disability Insurance, Wealth Protection, Your Professional Team

Starting Monday, January 11 through Friday, January 29, eligible City of Tacoma employees have an opportunity to buy affordable additional long-term disability insurance coverage through the City. While this benefit may not sound too exciting, it represents essential insurance coverage that can protect your income in the unfortunate event that you become disabled.

City of Tacoma employees should sign-up and take advantage of this benefit.

Who am I? My name is Geoff, and I am a financial planner with Puget Sound-based Merriman Wealth Management, LLC. I got excited after seeing the special benefits notice my wife received as a City of Tacoma employee. I do not work for the City or the vendor, and I do not receive any personal benefit from you enrolling in this extra disability coverage. I am just passionate about helping families make the best financial decisions possible and wanted to provide additional information on a topic that can seem overly complicated or may often be overlooked.

The FAQ below illustrates just how important this additional long-term disability coverage is, whether or not you have dependents:

What is disability insurance?

This type of insurance is used to protect your income and financial livelihood in the event of an untimely illness or injury.

There are two types of disability insurance: short-term and long-term. Long-term disability coverage is the most valuable because it replaces a portion of your income starting 90 days after your disability until recovery or age 65, whichever is sooner.

Don’t I already have long-term disability coverage through the City of Tacoma?

You do. However, for most employees this basic employer-paid benefit only protects 60% of the first $1,500 in monthly pre-disability earnings. This means that if you earn $6,250 a month or $75,000 a year, you will only receive $900 a month in benefits. Will $900 a month cover your bills?

How much extra income protection will this additional benefit provide me?

Up to $4,100 of extra income per month of pre-disability earnings. Combined with the basic employer-provided benefit described above, you could receive up to $5,000 of income replacement (i.e., a total of 60% of $8,333 pre-disability earnings). The employee from question two above, earning $6,250 a month or $75,000 a year, would receive $3,750 a month in benefits, which would go much farther toward being able to cover bills.

Note: Employees earning $100,000 or more would receive the maximum benefit of $5,000 a month.

What is the difference between the 90-day and 180-day waiting period options?

This waiting period, otherwise called the elimination period, is how long you have to wait to start receiving long-term disability payments from the insurance carrier. Premiums are naturally higher for the 90-day waiting period option as you will start receiving benefits earlier. The difference in premium for choosing the 90-day waiting period over the 180-day waiting period is offset by starting to receive income 3 months earlier.

How much does this benefit cost and how is it paid?

The benefit costs 0.303% of pre-disability earnings up to the pre-disability earnings cap for the 90-day waiting period option. This means the employee earning $75,000 would pay an extra $18.94 per month or $227.28 a year (i.e., 0.303% X $6,250 pre-disability earnings). Employees earning $100,000 or more a year would pay an extra $25.25 per month or $303 a year. This extra benefit far outweighs the additional premium cost.

Note: This premium cost would be deducted via payroll as a post-tax cost.

What happens if I stop working at the City of Tacoma?

Generally, you cannot keep group disability benefits like this one offered through the City of Tacoma if you leave (i.e., not portable).

If I do become disabled, how does the benefit work? How long would the benefit last?

In the unfortunate event of an illness or injury that qualifies for disability insurance benefits, you would file a claim with the disability insurance carrier that includes medical evidence of your disability. If approved, you would start receiving the above-described benefits after the waiting period until recovering from the disability or age 65, whichever comes first.

Would the benefits received from this extra policy be taxable?

Because the premium is paid post-tax rather than pre-tax where you receive a tax deduction for the premium cost, the disability payment you would receive would be tax-free. SAID AGAIN: All of the income received from this extra long-term disability coverage would not be subject to taxation. The tax-free nature of the payments further helps replace your pre-disability income (as your pre-disability income is gross income or otherwise subject to taxes).

Note: Income received from the employer-paid basic long-term disability coverage (i.e., 60% of the first $1,500 in monthly pre-disability income) would be subject to taxation. This is because your employer pays the premiums for this benefit.

What if I earn more than $100,000 a year? Do I need additional income protection beyond this extra benefit offered by the City?

Maybe. Start by asking these questions:

Does my contribution to covering household expenses exceed $5,000 a month?
Do I expect these expenses above $5,000 a month to continue for at least another year?
Do I expect my income and expenses to increase in the future?

If you answered YES to these questions (and be conservative on this), then it makes sense to consider buying an additional individual disability policy outside of your City benefits. This is especially important for households with a single earner.

An advisor can get quotes through an insurance broker to help you make an informed decision. It is also important to evaluate this decision through the lens of your overall financial plan, taking into account all of your goals and resources.

If you have questions about how much disability insurance coverage you need to protect your income or any other financial planning topics, like whether you are on track to achieve your financial goals, feel free to contact me directly at geoff@merriman.com.

Other useful resources:

Disclosure: The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax or legal advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital; past performance is no guarantee of future performance. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman Wealth Management unless a client service agreement is in place.

How Kids, Teens, and Parents Can Be Financially Smart—Together!

by Merriman | Oct 27, 2020 | Caring for Dependents, Family Talk, Goal Planning, Wealth Preservation

Why is it that when the words “children” and “finances” are mentioned in the same sentence, parents brace themselves like they are about to hear the punchline to a really bad joke? Well, it may be because children and finances are often characterized as two major topics that can cause stress and frustration.

This stress and frustration may be a roadblock, preventing parents from having an open dialogue about finances. Being a financially smart family is so important.

We want to tear down that roadblock and give you a road map to help you, your teens, and even young children develop great financial habits. When every member of your family understands basic finances and sets financial goals together, everyone feels more financially confident and accomplished.

Even doing something simple like money saving DIY activities together teaches them that saving can be fun and satisfying.

An American Psychological Association survey questioned parents on their relationship with their children and finances. The results revealed that only 37% talk often with their family members about the subject of finances.

Why is it that the vast majority of parents don’t talk about finances with their kids? Maybe most don’t know at what age to begin. Maybe they don’t know what to say. Or maybe they think talking about finances as a family isn’t important

Whatever the reason, you may find yourself as a parent in one of these three categories, needing an extra push to establish some basic familial financial habits. For you and all your children, let’s take a look at some ways to help everyone under the same roof get a better handle on the family finances without feeling the need to be an accounting professional.

Financial Tips for Young Kids: Show How Far Their Dollars Go

Do you often find yourself with your kids at the store having to say “no” to the many toys and candy bars that they have pulled off the shelf? Maybe you want to reward your kids with a little something, but they don’t always understand why that $40 limited edition Lego set may not be in the budget.

That’s because they are used to you being the gatekeeper of their spending. Instead, teach them how to be the gatekeeper of their own spending by giving them a bit of financial freedom under your supervision.

Financial freedom for an elementary- or middle-school-aged child should be exercised through simple, intentional actions. It can be as simple as giving them a small amount of money with the intention of letting them have the final say in how they spend it.

This simple action encourages thoughtfulness and awareness about the cost of something they want, which helps them feel a sense of financial freedom while still under your supervision.

Example: Say you want to reward your child by giving them $5 to spend at the store however they would like. Point them over to the dollar section or by the checkout, making note of the price tags that are displayed. Weigh the options of getting several small things versus one larger item.

They will feel empowered by the challenge of seeing how far their dollar can stretch. This sort of freedom helps them develop the habit of thoughtful spending, and it keeps Mom and Dad from always having to say, “No!”

Practical Goal: Take your child to a store of their choosing at the end of the week (if they’ve earned it) and give them a set amount of cash to spend however they would like. Help them weigh their options and select something that they are happy about.

Financial Tips for Teenagers: Responsibility Comes with Freedom

It’s time to make the pivot from the gatekeeper of all of your teenager’s expenses to a partner in their expenses. Teens are now at that stage of life where they are capable of earning a bit of income, and they need some extra help learning how to manage it.

Whether you and your spouse decide to give them a bit of weekly allowance or encourage a summer job, teens are entering the arena of earnings and need help with spending. It is important to establish basic habits now to help them feel confident in their spending habits in the future.

One of the most valuable skills that can help teens feel more confident with their money is helping them develop financial observational skills. This includes being aware of how much things cost, keeping track of where their money goes, and planning on how to save towards something they want.

This sounds basic, but these observational skills can help them become more thoughtful in their spending. The simple act of slowing down and thinking about how they should use their money will instill confidence and prevent impulsiveness.

Plus, you’ll be able to set financial boundaries with your teens while still giving them freedom to do what they want with their money.

Here is a list of different things you could do to help your teens become more financially observant and responsible.

#1 – Create a Savings Plan for Something Expensive

If your teen has their heart set on buying a more expensive item, brainstorm ways to make it happen. Help them make a savings plan or even suggest splitting the cost with you. Remember, you are their partner; you are there to encourage them, not control them.

#2 – Think of Their Money as a Budget, Not a Limit

Each week, take a few minutes at dinner to ask your teen about what they’ve spent that week. This will help them start thinking of money as a budget, not a limit. Ask them if they were happy with how they spent their money or if they wish they had used their money in a different way. All answers are great for learning.

#3 – Start Off with an Allowance at First

If your teen does not yet have any sort of income, consider giving them an allowance each month—an allowance that is contingent on something that you and your teen decide together. There is a sense of satisfaction that comes from earning money and choosing how to spend it that teens should begin to experience.

Practical Goal: Read these three examples together with your teen. Talk through how these examples can establish good spending habits, then select at least one of the examples to implement in the following week together.

Financial Tips for Parents: Take Charge of Your Finances and Give Wisdom

As parents, you and your spouse are in charge of leading financial conversations. Including your children in certain financial decisions can help you and your children be on the same page when it comes to money.

It’s not necessary for them to be aware of all financial decisions between you and your spouse. Kids and teens won’t understand high level concepts yet, but you can help your kids be more conscious of money when they have a say in casual, familial financial decisions.

A familial financial decision could be something like comparison shopping for family car insurance plans, but think of ways to involve the kids in that process that is appropriate for their level.

The first step to create an open dialogue with your children is to help them understand how their financial actions make a difference. When your kids feel like their voices are being heard and taken seriously, they will be more likely to actually want to talk about financial matters.

Just talking about how to spend your Saturday night together, weighing options and assessing price points of different activities, can help them better understand why sometimes the decision to do something is “no” and other times “yes.” Familial financial unity begins with frequent, honest discussions.

Example: Let’s say that you and your family decide to save up for a family vacation. Each member of the family decides how they are going to help contribute to this family goal.

Your youngest one may choose to eat at home instead of getting that after-school Happy Meal. Your teenager may volunteer to babysit the younger kids longer once a week so that a parent can get a few more hours in at their part-time job.

The parents can include a vacation savings allotment in the family budget as a way to slowly work up to the goal. With everyone playing a part in the goal, each family member can feel like they are contributing to the vacation.

Goal: Pick a family activity that appeals to everyone, figure out the estimated cost, then list out ways that everyone would be capable of contributing. Each week, check in on everyone’s progress to see how close you and your family are to that specific goal.

Now call your family together and set your goals in motion!

Written exclusively for Merriman.com by Madison Smith

Madison Smith is a personal and home finance expert at BestCompany.com. She works to help others make positive financial strides in their lives by providing expert insight on anything from credit card debt to home-buying tips.

How to Help Your Adult Children Who Are Struggling Financially

by Aimee Butler | Jul 21, 2020 | Aimee Butler, Caring for Dependents, Family Talk, Moorea Monaco, Wealth Preservation

Co-written by: Aimee Butler & Moorea Monaco

COVID-19 has impacted jobs across all sectors, and State Unemployment Agencies are reporting an unprecedented backlog of claims. We have been hearing from our clients of a desire to assist their adult children financially. Many of the questions include how and what kind of support to provide and if it makes sense. If you are in this situation, here are some ideas on how to temporarily assist your adult children during a financial emergency.

Start an emergency cash fund for your child.
- Make a one-time deposit or smaller, more frequent deposits to a high-yield savings account (like Flourish).
- Fun idea: Many banks or credit unions offer change deposit programs. They’ll round up your debit card purchases and transfer the extra change to a savings account. Think of it as a “Change Jar.” It adds up quicker than you think!
- When your child encounters a financial emergency, make one-time distributions or loan them the money. Anything they payback can be put back into the savings account for future needs.

Gift them highly appreciated shares of stocks or mutual funds from your Non-Retirement accounts.
- It could potentially benefit you by helping you avoid the capital gains tax if you sold the shares while they were still in your account.
- After the shares are gifted to your child, they can choose when to sell the assets, and they will incur any capital gains tax on what is sold. Structuring your giving this way can potentially reduce taxes for the family.
- Discuss this option with your Merriman Wealth Advisor to make sure it fits into your Financial Plan.

Offer small cash loans to cover emergency expenses.
- Discuss a payment plan that can start once your child’s financial situation improves.
- If mutually agreed upon, an interest-free loan with a small monthly payment is still more helpful than anything any bank could provide to them.
- It never hurts to have the agreement in writing and signed by both parties.

If you can’t provide an infusion of cash, little gifts can still make a big difference!
- Give gas or grocery store gift cards when you can.
- Meal prep large casseroles or frozen meals that can be heated quickly and serve many portions.
- Offer childcare when you can.

Help them review all options in their own financial life.
- They may be able to take a special distribution from their own IRAs or 401(k)s for hardships due to COVID-19.
- Introduce them to your Merriman advisor to help guide the review process.

DO NOT

Do not co-sign a loan for your child. As much as you want to help them, you could become liable for the loan, and it can negatively impact your credit history.
Do not ignore the tax ramifications of using retirement assets such as IRAs or annuities to give cash to your child. These assets can be taxed as ordinary income and have the potential of significantly increasing your income tax liability.
Do not stretch your own finances too thin. You need to protect your financial security first. We always recommend discussing large gifts with your Merriman Wealth Advisor, whether they be to charity or a loved one.

As parents, it can be extremely difficult to watch our children struggle financially and equally as hard to balance helping and overreaching. When making these types of decisions, we find that an objective third party like our advisors can help you make a decision that works for everyone. We encourage you to reach out if you need guidance with how best to help. We are here for you and your family.