<p>I’m looking for some help regarding finances. Mr PMK retired from the military after 22 years plus will be working for the next (at least) 20 years, as will I. While I hate to jinx us, we feel fairly confident with our retirement plan. Due to our son’s hoped for dream job, he will likely not have much in the way of a formal pension and who knows what will happen to social security. So, we’d like to set up a retirement account for him. Even though he’s only 21. Have I mentioned I like to worry ahead of time? </p>
<p>We’re think an IRA of some kind is probably the way to go and we will contribute a small amount to it each month until such a time in our son’s career that he can take over those payments. </p>
<p>Any advice? Any one already doing this? Am I miss some big pitfall of doing this? Any help is much appreciated. Thank you!</p>
<p>First of all IIRC your son must have earned income to make contributions to an IRA. I would recommend a ROTH IRA. Technically he may have to be the one to make the contribution, but you could give him the money to make the contribution with.</p>
<p>My father set us up with IRAs at an early age. He also continued to help me fund my retirement accounts during the early years of my working life, so that I could take advantage of the employer matching funds by contributing the maximum. </p>
<p>My understanding is that you can’t contribute more than you make, although that could be wrong. The first summer my daughter had a paying job, we set her up with an IRA and put an amount equivalent to her salary ($2K) in. (She first thought we wanted her to put in everything she’d earned and was a little alarmed–we clarified, we’d give her the funds for the contribution.)</p>
<p>One potential pitfall is that, as he gets established in life, he may prefer to have your contributions be available for real-life purchases now – car, house, furniture – rather than things for 50 years from now.</p>
<p>Yes, as soon as the child has earned income, he/she can open an IRA. Just check the current regulations about that.</p>
<p>If your child will be self-employed, investigate the regulations for SEP, SIMPLE, KEOUGH, and any other independent retirement fund. I haven’t looked at those lately, and can’t recall whether any of them have a minimum age requirement to set up. The SEP, etc. serve the role of a 401(k) or other company retirement plan, and can be set up in addition to an IRA.</p>
<p>Great advice from the others, and if the kid is on board, go right on ahead. I just want to let you know that I know a number of wounded souls, parents who did this sort of thing, or had some sort of trust or any kind of fund, and their kids, as young adults did not share the same goals and have the same plans for the money as the parents. The money will be HIS, not yours, and if he wants to pull it out and go on a trip around the world or use it for drugs, it’s his business. One young man I know bought a very nice expensive car to the absolute horror of his parents, with money that was supposed to be a nest egg for the future. And worse has happened.</p>
<p>My sons decided to go for ROTH IRAs in anticipation that their tax bracket will go up in the future so that taking the tax break now is not as important as not having that tax liability in accessing the money in the future. </p>
<p>I also want to add that I know some great adults, wonderful people that did less than wise things with nest eggs, inheritances and any other money set aside for them.</p>
<p>Wow, you are really sweet parents! We figured on private schools for pre-K through 12, college educations, weddings, and a little to get them started. It didn’t even occur to me to consider their retirements. </p>
<p>Kudos. I’m sure your kid will appreciate your thoughtfulness. :)</p>
<p>I think that it is indisputable the #1 thing you can do to help your child’s retirement fund is to fund their Roth IRA. There is absolutely no good reason to open a regular IRA for them (especially if he doesn’t need a tax break), but a Roth is perfect. If you really want to help him, fund the maximum it will allow (I think it is 5.5K this year), as early as possible. Of course, you can’t put in more than what his earned income is.</p>
<p>Think of this, it will grow for 40+ years, tax free, and never be taxed when he withdraws it. There will never be another deal like this, and I doubt this will last forever. That is why I’d contribute as much as allowed, as soon as possible.</p>
<p>Agree with funding their Roth IRAs. We started a ROTH IRA for each kiddo. Have let S take over for now. D isn’t earning any income, so we can’t contribute to a ROTH for her. If and when she gets a job and starts earning, we will fund it to the max for her & let her save her funds for other things for a few years. S has an excellent job and created a part-time job as well, so his earnings and savings are good.</p>
<p>If you can afford to contribute to your kids (or your own) Roth IRA, do it. The annual Roth IRA contribution is too valuable to lose. Let the money compound over time and withdraw tax free is a no brainer. Of course, there is always a risk that they will blow the nest egg, but we went through that dilemma when we open UTMA or 529 without a clue whether they will go to college or not. It can also be used it for education purpose or first house purchase, I think.</p>
<p>All I did was strongly encourage my kids to start a retirement fund as soon as they started working in their careers - taking full advantage of their companies’ 401-K programs including contributing at least enough to get the maximum company matching funds. </p>
<p>There was no need for me to contribute anything to their retirement funds or even to kick-start them - they’ll do fine on their own. </p>
<p>I’m surprised some parents feel the need to start their kid’s retirement fund and in some cases to make a number of contributions to it. I don’t think it’s generally needed. It’s nice that the parents are handing the (adult) kid free money I suppose, but it shouldn’t be needed. Note - this isn’t a criticism - just my own thoughts and feelings on the idea.</p>
<p>Forget about company pensions themselves since very few businesses have them anymore.</p>
<p>I personally would just encourage my kid to contribute the max to IRAs and 401Ks when she is working and then assume her inheritance from my estate would help fund her retirement!</p>
<p>We helped our kids start Roth IRAs funding their contributions (to the min of their earnings and the IRA contribution limit) for 3 reasons
To help them start their retirement savings
To help them start to learn about investing (our advisers are helping our kids also)
As a head start to transfer some assets with no inheritance tax risk</p>
<p>Seemed like a no brainer. The only issue we had was that for a couple of the kids their earning were so low it severly limited their investment options and made the fees pretty high (on a percentage basis).</p>
<p>If you are worried that your child will spend the money, you can:</p>
<ul>
<li><p>contribute to a Roth IRA without their knowledge - the Roth doesn’t require that contributions be reported. If they don’t know about it, they can’t blow it! This will require that you know some information about how much they make and whether they have contributed anything to any other retirement plans.</p></li>
<li><p>keep it in your own name in a separate account and invest in very long term investments. This will minimize the tax hit and you can let them inherit it with a stepped-up basis to avoid the taxes, or start gifting it to them when they get much older. It’ll cost you some extra in taxes but you keep control.</p></li>
</ul>
<p>Agreed… one thing about my parents is that they emphasized that we owned our own financial situation once we graduated from college. We were on our own to figure out rent, savings, day car expenses, etc. I think it made us all pretty practical and independent. Later, after we were all established adults, my parents did gift us some money annually that we could do with as we wished (including saving for retirement). So they could carry out their estate plan, but we also had some years when we had to figure out our own balance of making money vs doing something we liked that wasn’t very profitable. You can’t fund your kid’s entire retirement… the sooner they start figuring out on their own how to have the discipline to do it the better.</p>
<p>D1 knew enough to take advantage of her work 401K match, and also put money in a Roth last year (her first year of working out of college). If I had offered to put money in her retirement account, not sure she would have done this herself…</p>
<p>We are saving for our kids house down payment although we haven’t told them. It is likely that our kids will be living in areas with expensive housing which will make it hard to come up with a big down payment.</p>
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<p>That is our plan too. Hopefully by the time they get inheritance, they would be old enough and mature enough to be financially responsible. If not, too bad for them. We did all we can.</p>
<p>“I’m surprised some parents feel the need to start their kid’s retirement fund and in some cases to make a number of contributions to it. I don’t think it’s generally needed. It’s nice that the parents are handing the (adult) kid free money I suppose, but it shouldn’t be needed.”</p>
<p>I don’t think it’s feeling the need to fund their kid’s retirement. It’s recognizing the time value of money (especially tax free money), passing on some inheritance that isn’t going to get the living daylights taxed out of it, and feeling like the kids will be financially okay, no matter what happens in their lives. Really, that’s part of why we’re all here on this site in the first place. Trying to make sure our kids get into the colleges that are right for them, hoping they choose paths that will be rewarding for them. Doing our best to make sure that their future will be bright.</p>
<p>Now I’m not saying that anyone should neglect their own retirement, or get into debt for it. But if you feel that your finances are set, and you have some extra money, why not? Sure, there are kids with certain personality types that this would be a bad idea…it could encourage them to be lazy, not save for themselves, be less independent. Not all, though. My older son has funded his Roth for the last two years through college internships, and I’m sure he’ll have a good enough income to do it for himself as long as he likes. We were going to get them used cars as college graduation presents (didn’t get them anything for high school either), but I think it would be a better idea to start them off on Roths. We’ll start with our youngest this year, as though he’s working, it is a poorly paid job and he needs every cent he can get during the school year.</p>
<p>The time value of money is everything. Invest the Roth max starting at age 20 for just 10 years, at 10% rate of return, when they are 60 it’s worth 2.2 million. Try 5% rate of return–it’s 367K. Boy, let’s hope they get 10% rate of return! But that’s only investing it for 10 years, and it is tax free for life. Not many young people are going to make enough to fund a Roth in their twenties. I don’t think it’s worth withholding the money from them (if you comfortably can do it), just to teach them a lesson, unless you think they truly need that lesson. I feel that my kids are going to be very motivated and successful, regardless of what money they think they’ll inherit.</p>