The holidays are just around the corner. This is a great time to sit down with your loved ones and discuss important financial topics. Kids are home from school and most people are off from work, so there’s no better time to go over your financial goals together.
The Cheat Sheet spoke with Dan Keady, chief financial planning strategist at TIAA, to learn more about what these money conversations should look like and how to start the dialogue. Read on for some great tips.
The Cheat Sheet: Why aren’t families talking about finances?
Dan Keady: Most families are open to the idea of talking about finances, but too few are engaging in actual discussions. One of the main reasons families aren’t talking about finances is that both parents and adult children believe these discussions would be awkward or the topics discussed would bring up uncomfortable emotions. But talking openly about money is often easier than expected. It can even help bring families closer together. Importantly, the habits your grown kids develop now can stick with them well into their adult lives. Don’t be afraid to tell your sons or daughters about mistakes you’ve made and how you handled it. This way, it’s about sharing experiences, not just giving orders.
CS: What are some financial topics families should discuss with their college-age children during the holiday break? Why?
DK: One item that’s important to discuss is credit and credit cards. College kids are bombarded with credit card offers. Help them think of credit cards as a tool to track and manage spending and think of it as cash. If you find that your child is beginning to struggle with credit card payments, help them take action with their debt by coaching them on creating a new budget, looking into getting a lower rate from the credit card company, and trying to pay more than the minimum amount due. It’s also important to talk about retirement. Retirement is far from a young adult’s mind, but they should be aware of the consequences they may face if they delay saving for retirement.
CS: How can parents set up an IRA for a child? Is there an age limit?
DK: If you’re a parent, grandparent, or someone with a vested interest in helping a young person financially, you can fund an IRA for them. There is no age limit. However, they need to have some taxable income—at least as much as the amount you contribute on their behalf in a given year, to be eligible. You can make annual contributions up to $5,500 a year. Because you’re starting them on the retirement savings path early in life, they have time on their side as the account will have many years to grow.
The accumulation over time can be significant. Consider if you open an IRA for your daughter on her 20th birthday and contribute $5,000 every year for 10 years, stopping on her 30th birthday. Even if you never contribute another dollar, the balance would grow to more than $500,000 by age 65 (assuming an average return of 6% each year).
CS: What are some other benefits?
DK: Funding the account gives you a chance to talk about investing in general. After all, the quarterly account statements go directly to the younger family member, and he or she has full control over investment decisions for the portfolio. These conversations can be especially helpful for younger family members who will serve as executor of your will or inherit a sizable estate.
CS: What’s the best way to ask friends and family to contribute to a child’s IRA?
DK: Graduation is a great time to ask friends and family to contribute to a child’s IRA. Some gifts have a short lifespan and lose their value quickly. But the gift of an IRA contribution has the potential to grow substantially over time and enhance your long-term financial security and confidence. It’s a gift that your loved ones may well be proud to make.
Read more: Roth IRA for Kids: 6 Things to Know
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