Page 24 - GP fall 2023

Steps Parents and Grandparents Can Take for a

Child’s Financial Future

Author: David Rosenstrock
As a physician, when you end the workday There are two types of custodial accounts that needs to have earned at least the amount
with your patients and head home, you may are most commonly referred to as the Uni- you contribute from a W2 or 1099 job in the
not have much left to give to other aspects form Transfers to Minors Act (UTMA) and year you make the contributions.
of your life that need attention. Focusing on the Uniform Gifts to Minors Act (UGMA).
personal finance issues related to the respec- These accounts can allow parents and/or A custodial Roth IRA account might be
tive changes you are facing may not seem like grandparents to start investing for a child to- for you if you have an older child who is
a priority when you are in that moment. Tak- day. A UTMA or UGMA account is similar already earning an income, or you have al-
ing the right action steps and strategies in to a brokerage or taxable investment account ready set up a 529 or UTMA account for
these instances, however, can significantly for minor children. Since children are not your child’s benefit. One advantage of this
increase your chances of strengthening your eligible to directly own property, UTMA ac- account is that the funds are contributed af-
financial security and freedom. As busy counts allow parents and grandparents to in- ter-tax and can grow tax-free for decades.
parents and grandparents, we often feel be- vest for a child’s future while they are young. As a retirement account, one drawback of
sieged by events out of our control. It can be You have access to a very wide range of in- this account is that you will be investing
easy to overlook many aspects of our lives vestment options — unlike 529 plans which in highly long-term focused accounts for
as we focus on our day-to-day work and re- may have limited options. Your state of resi- young children, and they may not be able
lated issues. But procrastinating about safe- dence will determine the age your child will to access the money before retirement age
guarding the financial future of your family be able to access the funds; however, the age without incurring a penalty.
can be risky. Financial planning for your of majority for most states is generally 18 or
loved ones, however, can increase security, 21 years old. State law can vary with respect If you are the owner of an LLC or business,
reduce anxiety, and profoundly impact your to these accounts, and some states have tax one strategy you may be able to pursue is
family’s future and well-being. There are benefits for you contributing to a child or mi- to pay your child up to $13,850 (under cur-
numerous steps you can take to help set your nor’s 529 account. rent IRS regulations) for work done as an
children for a successful financial future. employee without them being taxed for the
Both of these are similar in goal; however, year and receive a deduction for it as an em-
The average cost of raising a child today the UTMA can hold a variety of different ployer ($13,850 is the standard deduction
from infancy to age 17, excluding college asset classes such as real estate and artwork. amount for single individuals in 2023, so
and higher education expenses, is approx- The UGMA account is limited to financial taxable income would be zero). So the busi-
imately $275,000 based on inflation-ad- assets such as cash, securities, bonds, and ness gets to take a deduction, but the child
justed U.S. Department of Agriculture mutual funds. These accounts are a good, pays no federal income tax. You should
estimates. Education costs are one of the flexible option for those parents who want consult your accountant or tax advisor with
highest expenses you will face as a parent their children’s money to grow but don’t respect to qualifications and your circum-
or your child will incur in the form of debt want to restrict the funds specifically to ed- stances.
upon graduating college. Published in-state ucation-related expenses.
tuition and fees at public four-year univer- This strategy can also be combined with
sities averaged $10,740 during the 2021-22 One common concern from parents regard- a Custodial IRA strategy to maximize the
school year, compared with $38,070 at four- ing UTMA or UGMA accounts is the age benefit. You could also put $6,500 into an
year, private nonprofit universities. The av- at which their children will be able to ac- IRA that is deductible, and you can use the
erage cost of college tuition & fees at public cess the funds. With respect to UTMA ac- IRS standard deduction to take their taxable
4-year institutions has risen approximately counts, capital gains, dividends, and interest income to zero. For instance, if you paid
180% over the last 20 years for an average accrued in them are taxable to the child’s your daughter $13,850 as salary, you could
annual increase of about 9%. parents regardless of who owns the ac- also put $6,500K into an IRA (contribution
count. However, these accounts are tax-free limit 2023) that is deductible, and you can
By electing to save for your child’s educa- or taxed at a low “kiddie” rate for the first use the standard deduction to take her tax-
tion in a tax-advantaged 529 investment ac- $1,250 of earnings in 2023. able income to zero. In this example, for
count, you can prepare children for college 2023, your business can deduct $20,350 as
or graduate school tuition. This account al- A custodial Roth IRA is another type of payment to your child, and this amount will
lows your money to compound over time (if investment account that should be consid- not be taxable income for your daughter.
appropriately invested), and you don’t have ered depending on the circumstances. This When a minor has reached age of majority,
to pay taxes on the earnings if the money account is just like a regular Roth IRA, but the custodial Roth IRA account will need to
is used for qualifying education expenses. is intended for a minor child earning in- be changed to an individual Roth IRA ac-
More than 30 states provide some measure come. It is subject to the same contribution count (in the child’s name and Social Secu-
of a tax deduction for 529 account contribu- limits as regular Roth IRA ($6,500 in 2023 rity number).
tions. If you’re fortunate enough to live in if you’re under age 50) and income limits
one of those states, then you can also reduce (2023 modified adjusted gross income of
your state tax bill. Grandparents can also under $153,000 for single filers or $228,000
contribute to a 529 plan. for married filing joint filers). Your child

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