Recently, a prospective family was preparing for the birth of their first child. They asked, “What should we be doing to prepare for a child financially?”
A friend, a fellow financial planner, and I discussed, “Should we get life insurance for our children?”
A long-time client was preparing for their 18-year-old son to go to college, “is there anything we need to do now that our son is in college?”
Before we begin, heed this warning. As parents, putting on your proverbial oxygen mask before assisting others (including your children) is essential.
You can get student loans.
You can borrow money to purchase a car or home.
However, you cannot finance retirement.
Without further ado, I want to share some financial planning considerations for your children.
Estate Planning Documents – Name a Guardian
If you have minor children, you must have your primary estate planning documents (will, power of attorney, medical directives, etc…).
You must name a guardian should you pass away with minor children. Wouldn’t you rather proactively choose who would be best suited to care for your children? If you don’t, a judge who probably doesn’t know you will decide on your behalf.
Estate Planning Documents – Power of Attorney for Children
You probably know why you need power of attorney for yourself and your spouse.
However, you may have neglected the importance of having a POA for your children.
Consider the example of your 18-year-old child who goes away to college.
Something happens. Without a POA for your child, the information you receive could be minimal. Once your children become adults, your legal rights as a parent are substantially minimized.
Life Insurance – On Your Kids?
As parents, we know the critical importance of life insurance in a financial plan. Life insurance is often needed to ensure our family has minimal economic disruptions in the event of an untimely death.
However, should we get a life insurance policy for our children?
If you have a family history of adverse medical conditions, it could be crucial to secure life insurance coverage.
A close family friend has a daughter. His wife was recently diagnosed with breast cancer. His wife’s mother and grandmother also had breast cancer.
One downside of securing a life insurance policy on minor children is that the policy is often issued at a standard rating instead of a potentially more preferential rating of preferred or super-preferred.
Roth IRA Contributions
Lemonade stand? Mowing the grass? Editing social media videos? Umpiring Little League baseball games?
If your children work, document it. Confirm with your CPA, EA, or tax preparer that your children’s income qualifies to make a Roth IRA contribution.
Minor children can have Roth IRAs!
Consider that your 8-year-old makes $2,500 yearly mowing grass and shoveling snow for ten years.
Assuming a 7.8% rate of return, the $25,000 in Roth IRA contributions as a minor would be worth $1,224,234 at age 65.
Planning for Future Education
There are many ways to save & invest in your children’s future education.
The most popular ways to fund education expenses:
529 College Savings Plans, UGMA/UTMA, Brokerage Accounts, Cash Value Life Insurance
To be clear, they all have their pros and cons.
In my opinion, the 529 College Savings Plan just got better.
If you have unused funds in the 529, up to $35,000 can be transferred to your child’s Roth IRA without penalty.
A couple of considerations:
-The 529 Plan must be open for 15 years before you can transfer the funds.
-You can only transfer up to the annual Roth IRA contribution limits. For example, if the annual contribution is $7,000/ year, it would take potentially five years to transfer $35,000 into your child’s Roth IRA
In conclusion, every family’s financial situation is unique. I wanted to provide five potential financial planning tactics worth your consideration.
If you or someone you’re close to could use help aligning their finances and establishing a financial plan, please reach out to us, we’re accepting new clients and eager to help.
10 Actions To Take 10 Years Before Retirement
In this paper we discuss 10 actions you should take to develop and deploy a successful long-term wealth plan. It will help you make decisions about your financial journey today and well into your retirement chapter.