3 Steps to Take in 2024 for Your Kids
What are your goals for the new year? You may be considering new year’s resolutions like going on a diet, starting an exercise program, or learning a new skill. In addition to self-improvement, why not consider some resolutions that will set your children up for success this year and beyond?
Here are the top 3 things you can do for your kids to add to your list…
1) Start a 529 Plan
College is expensive! It is never too early to start saving for it. Starting when your kids are just toddlers reduces the amount you have to sock away and puts you way ahead of the game. But even if your kids are in high school, you still have time to benefit from savings strategies. 529 plans are a great option because there are no income limits to participate, the account grows tax free, and the funds remain tax free if used for qualified education expenses. Contributions are even deductible from state income tax in some states.
But what if I save too much or my kid gets a free ride? These are “problems” often expressed but rarely encountered. Qualified expenses include things that often aren’t covered by scholarships and put an unexpected dent in your budget like off-campus housing or a new computer. But if you do find yourself with excess funds, there are a variety of options available. If your kid gets a scholarship, you can take that money out without penalty. They could also use it for grad school, or you can change the beneficiary to a sibling or grandchild. Recent legislation will also allow some excess funds to be rolled into your child’s - or potentially even your own - Roth IRA. The probability of saving too little far outweighs the possibility of ending up with too much, so get started now!
2) Start a Roth IRA…for Your Child
Roth IRAs are terrific for savers below certain income limits who are in a low tax bracket now but expect their tax bracket to be higher at retirement. Sound like anyone you know?
If your child has a part-time or summer job, they are likely exempt from (or paying very little) income tax. Even so, they can contribute up to $6,500 or their total 2023 earned income, whichever is less, after tax (little as that tax may be), and the account will grow tax free throughout their life. Qualified withdrawals will be tax free in retirement. In other words, they will pay little or no tax on this money ever!
How could this play out? Let’s say Junior manages to sock away $10,000 in a Roth IRA by age 20 and never touches it or saves another dime. At 9.6% return (the average for the S&P 500 Index for the past 20 years), they would have over $450,000 at age 60 – tax free!
Start soon – your child can put money into a Roth IRA for 2023 up until tax day and then start on 2024 when the limit increases to $7,000.
3) Create an Estate Plan
No one likes to consider their own mortality, but we know we will all die eventually. We hope that is later rather than sooner and try not to think too much about it. But chances are that someday your children will be faced with many decisions and administrative burdens at an already sad and stressful time.
You can give them a tremendous gift by planning ahead and making your wishes known. And it’s not just about the Will. A complete estate plan also includes guardianship for minor children, and directives for who will handle your finances and health decisions if you are unable to speak for yourself. An estate plan is important for everyone with loved ones, not just the wealthy and the elderly. There are many affordable options for getting it done. If you don’t have one, now is the time!
We hope you stick with your diet, manage to run 5 miles per day, and learn French, if these things are on your list. But we also encourage you to tackle a few things to set your children up for success. Now is the perfect time to take these simple steps that will benefit them throughout their lives!
This article is for informational and educational purposes only and should not be considered investment, financial, legal, or tax advice. It is not a recommendation for purchase or sale of any security or investment advisory services. Please consult your own legal, financial, and tax professionals to determine what may be appropriate for you. Our full disclaimer may be found HERE.
