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: Advisor, 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?
Advisor: 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.
Advisor: Great! One way you could help her is to fund a Roth IRA for her.
Client: Really?! She can have a Roth IRA?
Advisor: Yes. Since she has earned income, she can contribute to a Roth IRA.
Client: How much can she contribute?
Advisor: 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?
Advisor: 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.
Advisor: 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.
Advisor: 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!
Advisor: 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?
Advisor: 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.
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