• Subscribe
  • Secure Kids’ Wealth ๐Ÿ“ˆ

    Do you want to build wealth for your children?

    Here are 4 effective ways to do so:

    529 account

    A 529 account is one of the best ways to invest for your child.

    It offers two benefits:

    • Tax-free withdrawals for qualified education costs.
    • Often state tax-deductible.

    For example, say you put $10,000 into a 529 plan.

    Depending on the state, you might receive a deduction, saving you anywhere from $200 to $1,300 in taxes, depending on your rate.

    By the time your child is ready for college, the amount may grow to $30,000.

    You can use that $30,000 for qualifying educational costs without paying any taxes.

    โ€œBut what if my child skips college?!โ€

    If the 529 plan has been open for at least 15 years under a specific beneficiary, you can convert up to $35,000 to the Roth IRA. So, itโ€™s best to open a one 529 plan for one child. 

    Brokerage account

    You can also open a brokerage account and invest in it for your child.

    The main benefit of a brokerage account over a 529 is that you can withdraw the invested amounts for any reason, not specifically for educational expenses.

    Additionally, brokerage accounts allow you to invest in a broader range of assets, while a 529 plan could be limited depending on your state/option.

    I personally believe that you should diversify between a 529 and a brokerage.

    Roth IRA

    You cannot contribute to your kidsโ€™ Roth IRA unless they have earned income.

    So, if you are a W-2, there is nothing you can do about it. But, if you are a business owner, you can put them on payroll.

    There are a few rules to keep in mind:

    • Reasonable wages based on the job
    • Tracking the hours and duties
    • Actually paying them for the work
    • Filing W-2 and payroll reports

    A few examples Iโ€™ve seen are scanning documents for a tax firm or modeling for a social media account.

    This will allow your business to get a tax deduction, and since your child will be generally below the standard deduction, pay $0 in federal taxes.

    Then, you can contribute to a Roth IRA for your child. Imagine 50+ years of compounding growth in a tax-free account? That is a wealth builder for your child.

    Bonus tip: Roth IRA amount is not counted towards FAFSA for your childโ€™s education.

    Trusts

    This is a more advanced strategy and generally isnโ€™t recommended for taxpayers with less than a $5M+ estate, but you could set up an irrevocable trust and transfer $19,000 (the maximum gift annual limit to avoid impacting the estate exemption).

    What this accomplishes is that it removes $19,000 from your personal estate (taxed at the maximum rate of 40% when your next kin inherits the money if the estate exceeds the annual exemption amount of $14M) and puts it into a trust.

    So, effectively, you are saving a maximum of 40% of federal taxes (plus some state taxes) on the amount gifted.

    You would need a qualified lawyer and incur additional fees and compliance to set it up correctly, but it’s certainly worth it at that net worth level.

    I hope you enjoyed this one.

    See you next Saturday.

    MC, CPA

    Sign up for The Crunch:

      Whenever you're ready, here is how I can help you:

      1. $0 Debt Blueprint: A free 28 page e-book for everything you need to know to pay off debt. I detail the practical steps you can take to immediately improve the quality of your financial decisions through researched methods. I provide you with examples and templates that you can use right away.ย 

      Subscribe to the Newsletter

      Join 10,700+ readers of The Crunch
      for exclusive tips, strategies, and resources around personal finance.

        Share this article on: