Have teens or children in college? Senior wealth adviser Dawn Doebler says there are three important financial conversations you should have with your kids while they are home for the holidays.
WASHINGTON — The holidays are a special time for my family when my children are home from college and we have time to reconnect with one another.
I find it’s an ideal time to talk to them about important issues when they are not stressed out about exams, papers and projects. It’s also a great time to teach your kids — young and old — about financial concepts and instill positive behaviors about money.
Along with teaching them these values, I share the same worries that every parent has about our young adult children’s health and safety. Here are a few of the most important topics to discuss with your children in the next few weeks.
Protect your right to help your child in the event of illness or injury:
Every parent’s greatest fear is that they will get a phone call that their young adult child has had an accident or is suddenly very ill. What many parents don’t realize is that they could be denied knowing their child’s condition or being consulted on critical medical decisions on their child’s behalf by doctors and hospital staff.
This happens more often than we think because of HIPAA, the federal Health Insurance Portability and Accountability Act of 1996, which sets out strict rules to protect a person’s privacy. Doctors, hospitals and health insurers are held to these standards and will be the ultimate decision-makers about what and how much information they share with you if you don’t have written permission from your child.
It’s a good idea to sit down with your adult children during the holidays and have them sign a HIPAA authorization granting permission to share medical information with you. If they are concerned about how much information you have access to, they can stipulate not to disclose information about drug use, communicable diseases, mental health issues or other conditions they may want to keep private.
If your teen or college student earned income this year, talk to them about opening a Roth IRA to save some of that money.
To make your point even more impactful, show them how small amounts of money saved when they are younger can grow exponentially over time. For instance, if your 20-year-old makes a one-time deposit of $5,000 into a Roth IRA, they could end up with almost $75,000 by the time they turn 65. (Assuming a 6 percent annual rate of return, net of fees. Keep in mind that returns may vary year to year. This is simply to illustrate the power of compounding interest over time.)
You can also gift funds for deposit into a Roth IRA for your child (or really anyone). Keep in mind that they must have earned income for you to make this gift to their account and your contribution cannot exceed their earned income for the year or $5,500, whichever is less. So if they earned $3,000, you can only contribute a maximum of $3,000.
The growth on contributions made to a Roth IRA is tax-free if it’s held in the account for at least five years and can be withdrawn at age 59.5 — tax and penalty-free.
Young adults should know that there are exceptions to the 10 percent early withdrawal penalty if the money is used to:
Purchase a house: The withdrawal is limited to $10,000 to be used to pay for the down payment and any closing costs for a first-time home purchase.
To pay for education expenses: As long as the money contributed to the Roth IRA was held in the account for five years, it can be withdrawn tax and penalty-free for qualified education expenses such as tuition, fees, books, etc. So, what happens if the contributions were not in the account for five years? Your child or grandchild can withdraw the original contribution, but not the earnings, penalty-free. Another advantage: Roth IRAs aren’t included as an asset for the student or parents on the Federal Financial Aid Form.
Teach them the power of a match:
Winter break from college or high school classwork is a great time for your young adults to earn extra income. Encourage their industrious endeavors by offering to match some or all of the money they make during this downtime. Most of us have matching programs through retirement plans at work and know that “free money” can be a powerful incentive to work and save.
Your matching dollars can be used as extra spending money for their next semester or you could use it to fund a Roth IRA for them.
Enjoy your time as a family this holiday season, and remember to take a break from watching “Elf” or “Home Alone” to instill good financial habits in your kids while you still can.
Doebler is a senior wealth adviser at Bridgewater Wealth, in Bethesda, and co-founder of Her Wealth.