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Scroll through the “Rich Kids of Instagram” feed for a few seconds and anyone can see the appalling and even dangerous behavior that can result from giving mountains of money young, impressionable minds.
Like the post of a young man swatting a Rolex with a golf club for kicks. Or the endless shots of teens posing in private jets or on top of impractical high-end sports cars.
Nevertheless, a lot of parents with assets find themselves in a quandary. They want to give to their kids while they are alive to see the impact.
Done right, the generational flow of cash or stock from a parent to an adult child can be a positive experience, a signal that elders believe you are likely to be prudent and careful with a financial windfall.
Recipients of sudden money know, too, that gifts often come with strings attached, spoken or unspoken. So how do you handle a financial gift from a relative? How should a parent handle the giving part?
Game plan
First, go ahead and talk about it. Discuss what you plan to do with the money. Sometimes there are motivations that parents believe are too obvious to spell out: Support for a grandchild’s education, for instance.
If that’s the case, suggest that they make tax-free gift contributions to 529 plans in the kids’ names instead. If your parents say “you decide,” write out a proposal your parents might feel good about funding for years to come.
That might be a partial contribution to a 529 and perhaps some spending on yourself, say upgrading a kitchen, purchasing a newer car, or paying off a nagging debt. Any time you can permanently reduce debt, that’s a win.
Another suggestion is to pay the gift forward to your future self. If you have earned income in the current year and are under the federal income limitations, open a Roth IRA.
Any tax-free gift money you get that is routed directly into a Roth becomes tax-free forever. You owe no gift tax, no income tax, and no future tax — a triple tax win.
Powerful growth
Whatever its source, Roth money grows tax-free and can be taken out tax-free later. Be aware you can only withdraw without tax penalties what you put in prior to age 59½, so this money needs to be thought of as long term.
If all these stipulations fit, however, putting gift money into a Roth is a powerful way to grow retirement savings.
And that, ultimately, may be the move which your giving relatives most approve. After all, they likely know the compounding power of investments and want for you to enjoy the same life they have had after they are gone.
