The concept of gifting comes up a lot in estate planning. Gifting can be a great tool. People often explore this option when they are trying to reduce the size of their estate at death. Others just simply like the idea of watching their loved ones benefit from the inheritance during their lifetime.
Gifting, however, can sometimes carry negative consequences, especially if a person finds themselves in need of Medicaid Long Term Care. Elizabeth A. Anderson, Esq., a partner and co-owner of our firm is being interviewed next month on the affects that gifting has on Medicaid Long Term Care planning, and we hope to share a snippet of that interview on our blog later this summer.
A Novel Idea
While discussing gifting options among our firm, our CPA, David P. Bolenbaugh, of Duys and Bolenbaugh CPAs, brought a novel idea to mind. What if we don’t gift, but we instead hire our children? Why would you want to hire your child? What are the benefits of that over a straight gift?
The concept of hiring your child primarily benefits those with children who are of working age but are still under age 19. As soon as your child begins to earn an income, you can help your child open a Roth IRA and set a contribution goal for them to reach before they graduate from high school.
Assuming your child receives an 8% rate of return over their lifetime, the investment they made by age 19 will grow up to 40 times in value by the time they reach 67 years of age! We tend to forget how powerful compound interest can be. For example, if your child can invest $2,500 before graduation, it will grow to $100,000 by the time they are 67. If they can invest $25,000 before graduation, they would have $1 million by the time they are 67!
Tips to Increase Saving
I know saving $25,000 as a high school student seems impossible, but here are some tips David Bolenbaugh provided:
Hire your child: Roth IRA contributions are limited to the amount of income your child earns, so earned income is key. If you own a business, consider hiring your child to help with cleaning the office, filing, or other tasks they can handle.
Look for acceptable young-age work ideas: Babysitting, yard work, walking pets, shoveling, and lawn work are all good ideas to get your child earning income at a younger age.
Leverage high school years: Summer jobs, paid internships, and part-time jobs during the school year can produce a consistent income flow to contribute to their Roth IRA and still provide spending money.
Parent or grandparent matching: The income earned by your child doesn’t have to be directly contributed by them to the Roth IRA. The Roth IRA simply sets the contribution limit. Make a deal that for every dollar of income your child saves for college, a parent or grandparent contributes a matching amount to their Roth account.
This is definitely a different approach to gifting, but it could be a great way to teach your children how to save for retirement at an early age. It also provides the family a safe mechanism for you to help your child get a head start on saving. We love collaborating and learning from all our trusted advisors within our network, but be sure to check in with your financial advisor or CPA to see if this approach works for you. If you would like to speak with David Bolenbaugh directly, feel free to contact him at 303-727-1040.