Financial Well-Being: Educating Employees About Financial Strategies for Kids

December 2019

By Beth Garner and Joanne Szupka

It is natural for parents to be concerned about their children’s financial futures. This can become a problem for employers if parents take this worry to work every day. For employers, helping employees deal with financial stress related to their child can contribute to a more engaged, productive workforce.
 
Two of the most important factors of a child’s long-term financial success are paying for college and saving for retirement. Fortunately, there are tax-advantaged strategies that parents can use to help their kids get started in both of these areas—and employers are in a unique position to help their workforces learn about these tools.
 
Surveys show that, more often than not, employees trust family members and their employers when it comes to financial education. Here, we will review some of the strategies that employers may want to consider sharing with their workforces as part of a broader financial well-being campaign.
 

Retirement: Roth IRAs for Teens 

When it comes to saving for retirement, time is the most powerful lever. The earlier one starts saving, the more opportunity they have to leverage the power of compounding. Taxes also play a huge role in the success of any retirement strategy. Because of these two truisms, parents may want to consider having their children contribute to an individual retirement account (IRA).
 
Children, regardless of age, can open and contribute to a traditional or Roth IRA as long as they can show that they have earned income. The amount that can be contributed to an IRA in 2019 is limited to the lesser of $6,000 or the amount of the child’s earned income during the year.
 
Parents can help with the contributions, but, again, the total amount that can be contributed to the account—whether it comes from the child directly, the parent or both parties—is limited to the amount of the child’s earned income up to the $6,000 cap.
 
There are two primary IRA options: a traditional IRA, which provides an up-front tax deduction, and a Roth IRA, which provides a tax break on the back end.
 
Children can open a traditional IRA, in which pre-tax dollars fund the account and withdrawals after the individual reaches age 59 1/2 are taxed at the individual’s tax rate at the time; or a Roth IRA, in which after-tax dollars fund the account and withdrawals after age 59 ½ are tax-free.
 
In most cases, the Roth IRA will be more advantageous for children because they are likely to be in a much lower tax bracket as teenagers compared to when they retire.
 
To showcase the power of investing early into perspective, consider the example of a child who begins contributing $2,000 a year to a Roth IRA at age 13. Assuming a 5% return on the investments and that the person continues contributing the same amount every year, by the time he or she reaches age 65, the account will have grown to nearly $490,000, all of which will be tax-free. Increase the annual contribution to $3,000 and the total jumps to $733,000.
 

College Savings: 529 Plans and Other Options

Last year, tuition to private colleges cost an average of $46,680, while public schools averaged $19,080, according to the College Board’s Annual Survey of Colleges. According to the Princeton Review, in 2006 parents’ biggest worry was getting their child into the right college, but now the biggest worry is the level of debt taken on to pay for the degree.
 
There are many tax-advantaged strategies that parents can use to begin saving for college, highlighted by 529 plans. Contributions to 529 plans grow tax-free if the money is ultimately used for qualified college education expenses. The Tax Cuts and Jobs Act passed in 2017 allows parents to withdraw up to $10,000 annually for private elementary and high school expenses.
 
These popular college-savings plans are available at the state level, and parents can choose to enroll their children in plans outside their state. Some states allow income tax deductions (up to a specific amount) for in-state users. Accounts are transferable as well, so if the first child winds up not going to college, the assets can be transferred to another child, who does not have to be a sibling. 
 
Parents looking to avoid the gift tax need to contribute $15,000 or less per child for singles or $30,000 for married couples. There are opportunities to front-load up to five years’ worth of gifts ($75,000 per individual or $150,000 per couple) into one year.
 
Coverdell Education Savings Accounts are another college savings tool. These operate similarly to 529s, but Coverdells have a $2,000 contribution limit per year. While 529s can be used to pay for tuition and certain related expenses, Coverdells pay for other educational expenses like books, supplies and tutoring. One catch is that there are federal income limits that apply each year (for 2018, it was $110,000 for single-filers and $220,000 if filing jointly).
 

BDO Insight: Get Priorities Right

Just like the flight attendant tells passengers to put their own air mask on first before helping others, employers should stress the importance of employees prioritizing their own retirement savings over helping children with their finances. Children have time and options for funding their college and retirement expenses, but once you reach retirement age, your options are more limited.
 
Employers are taking a more holistic view of their employees’ financial well-being. Educating employees about strategies for their children can be a valuable piece of this effort. Your BDO representative is ready to help you understand the various opportunities you may have to educate your workforce.
 

CONTACT
 
Beth Garner
Assurance Partner
National Practice Leader, Employee Benefit Plan Audits
   Joanne Szupka
Assurance Director
Northeast Region Practice Leader