One of the questions our team is frequently asked is “how do I educate my kids about money?”.
For many, wealth planning involves preparing your heirs to be good stewards of your wealth and to carry on your legacy after you’re gone. Furthermore, it is most parents’ hope that their children will grow up making smarter decisions than they did, and perhaps avoid some of their own mistakes. The goal of this series is to help educate the next generation on the most foundational pieces of wealth planning and to create a launchpad for your family to discuss values surrounding money.
When we talk to our clients and their families about financial literacy for the next generation, we find it useful to break down the conversations into four life stages:
1. Grade school
2. High school/preparing for college
3. College/early career
4. Building a family (marriage, children, etc.)
For this post we will cover the second group – kids in high school and preparing for college.
The three best tools for this age group are:
• Checking account
• Credit card
• Roth IRA
A checking account is a great way to give your high schooler a sense of ownership and control over their money, while also giving them much-needed practice before going off on their own. They can see how online banking works, monitor their balance, manage a debit card, and witness the impact of their increasing freedom to spend. If they have a job, setting up direct deposit is an easy idea to ensure the account is funded and to help your teen learn about cash flow and budgeting. They can even replace their piggy bank with a linked savings account, allowing them to easily set aside savings for whatever goals they might have. The good news is most banks have an app, which for many teens is an easy and intuitive way to interface with their account.
The second item we recommend is a credit card with a $500-$1,000 limit. We like this for a few reasons: firstly, it’s a good emergency line if your teen gets into a situation of needing money quickly, such as a car breaking down or medical emergency. Secondly, it teaches how credit cards work and how the balance can fill up quickly after only a few swipes (thus the limit of $500 - $1,000). Only you and your teen can determine what rules should surround the use of the card based on their habits and readiness. For some, it’s best to reserve it for emergencies while others are ready for the responsibility of using it for everyday spending and paying it off each month. Lastly, it will help establish and build credit which is often needed when getting a first apartment and, sometimes, first job out of school. We’re often asked if the teen should be added as an authorized user on a parent’s card or if a parent should be added as a joint card holder. The age of your child will determine what your options are, but for those 18 or over we recommend a separate line.
Lastly, we recommend starting a Roth IRA as early as possible. This is funded with money that has already been taxed, but the account grows tax deferred. The balance of the account can then be withdrawn tax-free at the time of retirement (after attaining age 59 ½) or for certain other qualified situations*. It is important for you and your child to understand that withdrawals made outside of those parameters are subject to a 10% penalty and taxation on the account’s gains. At the time of this publication, eligible individuals under age 50 can contribute up to $6,500 per year to a Roth (note that you cannot contribute more than your earned income for a given year, so the limit will be the lesser of those two figures). This is an ideal way to introduce the idea of saving for the future and demonstrate the power of compounding returns for long-term goals. Additionally, anyone can make Roth contributions on behalf of your child as long as the child is eligible to make contributions (ie. they have earned income, as described above).
We hope this has provided useful information about how you can help your teen lay the foundation for their financial future. If you ever have questions or want to discuss how to implement these tools, don’t hesitate to contact Amanda at 414-644-0061 or amanda@oharewealth.com.
*To be a qualified distribution, the distribution must satisfy a “5-year exclusion period” and any one of four (4) regulatory “triggering events” (see below). To satisfy the 5-year exclusion period requirement for purposes of being a qualified distribution, a Roth IRA distribution would have to be made no earlier than January 1 of the year following the close of the 5-year exclusion period (measured from Jan 1 of the tax year in which the first contribution is made). Both requirements must be met.
Triggering Events for Qualified Distributions:
• The participant attains age 59 ½;
• The participant dies and the distribution is made to a beneficiary (or the participant’s estate);
• The participant becomes disabled (same definition as applied to disability for Traditional IRAs); or
• The distribution is used to pay for qualified first-time homebuyer expenses.
When Steward Partners provides investment advice to you regarding your retirement plan (“Plan”) account or individual retirement account (“IRA”), we are fiduciaries within the meaning of Title I of the Employee Retirement Income Security Act (ERISA) and/or the Internal Revenue Code, as applicable, which are laws governing retirement accounts. The way we make money creates some conflicts with your interests, so we operate under a special rule that requires us to act in your best interest and not put our interest ahead of yours. On December 15, 2020, the Department of Labor (“DOL”) issued their final interpretation of who is a fiduciary under ERISA and the Internal Revenue Code as well a new class exemption, Prohibited Transaction Exemption (“PTE”) 2020 -02. PTE 2020-02 requires fiduciaries to comply with the impartial conduct standards which are:
1. The fiduciary must provide advice in the “Best Interest” of the Retirement Investor
2. The fiduciary must charge “reasonable” compensation for the services provided
3. The fiduciary must avoid misleading statements about investment transactions, compensation, and conflicts of interest.
Please see important disclosures and information about our products, services and conflicts of interest, in the Client Relationship Summary, Supplemental Disclosures, and Form ADV; all of which are available at https://www.stewardpartnersis.com/Regulatory-Information-&-Disclosures.10.htm.
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