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When Your Kids Ask For Money, Are You Hurting Your Own Financial Future?

Maryalene LaPonsie, Childrens Financial Needs

With Maryalene LaPonsie, Personal Finance Journalist, Contributor at US News & World Report

Growing up is expensive.  For young adults, a reasonably lavish wedding could cost a pretty penny and buying a house in a desirable neighborhood may require a down payment that’s more than they can afford.  In such instances, how can parents help with their children’s financial needs without jeopardizing their own retirement?  To answer this and related questions, Steve speaks with Maryalene LaPonsie, a personal finance journalist who specializes in personal finance, retirement planning, and Social Security and recently wrote an article titled “Your Kids Want Your Money: How to Juggle Retirement, College, and Wedding Expectations.”

In her article, Maryalene makes the case that parents need to first put themselves in a good position for retirement before they spend all their money helping their kids.  She says parents are often so concerned with the idea that they’re going to have a 40-year-old living in their basement, that they’re not thinking about the fact that they could someday be 70-year-olds living in their 40-year-old child’s basement.

Multi-Generational Cycle Of Poverty

She believes parents may think they’re doing their kids a favor by helping them pay for college or helping them buy a house, but they could actually be doing them a long-term disservice by not saving for their own retirement.  Long-term care costs could easily reach $100,000 a year, Maryalene says and shows how parents could perpetuate a multi-generational cycle of poverty if they depend on their kids down the road.

529 College Savings Plans

Steve then wants to know how parents can best set money aside for their college-bound children and help with children’s financial needs.  If parents have funds to spare, Maryalene recommends using a tax-deferred 529 plan where the parents retain full control of the money and designate a beneficiary who receives funds for qualified college expenses.  She outlines the other benefits and features of a 529 plan, something that Steve had also covered in a recent commentary.

Maryalene addresses Steve’s query on how to manage a situation where your children ask for a loan or a gift, especially if it’s an expensive wedding that could set parents back financially and jeopardize their own retirement.  She speaks of parental guilt over all the mistakes they’ve made and reminds parents that they really do not owe their kids anything.

That said, even if parents can afford to fund their children’s financial needs, they must think of the negative repercussions of doing so, such as children being ill-prepared to meet life’s financial and other challenges.

Roth IRA Is An Excellent Way To Save For Retirement

Steve compliments Maryalene on how she presented the Roth IRA in her article.  While a Roth IRA does not give you a deduction for putting money into it, your money grows tax-free and you can use it for retirement or pull it out to pay for college expenses and help with children’s financial needs.  While that sounds really good, Steve highlights its limitations, such as the $5,500 limit on contributions ($6,500 if you’re above the age of 50, with the additional $1,000 as a catch-up contribution) and income limits.

Maryalene agrees with Steve’s limitations and adds results from the math she did on 18 years of Roth contributions still not being sufficient to pay for four years of college because of the Roth IRA $5,500 contribution limit.

In closing, Steve refers people to his website, StevePomeranz.Com, which has numerous articles on college expenses, 529 plans, and retirement financial planning and urges listeners to sign up for weekly updates on what’s been covered on the show, so they can be well prepared for retirement and helping with their children’s financial needs.

Disclosure: The opinions expressed are those of the interviewee and not necessarily of the radio show. Interviewee is not a representative of the radio show. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by the radio show.

Read The Entire Transcript Here

Steve Pomeranz: Growing up is expensive. When young adults want to get married, that may mean a lavish wedding to kick off the partnership. Also, buying a house could require a bigger down payment than the money they have in the bank. As a parent, how can you help them without jeopardizing your own retirement? I’ve invited personal finance journalist Maryalene LaPonsie to join me today to discuss just this. Welcome to the show, Maryalene.

Maryalene LaPonsie: Hi, Steve. Thanks for having me.

Steve Pomeranz: This is a part of your article that I really liked: Young adults can earn scholarships for college, but there is no scholarship for retirement. What does that actually mean to adults, parents that are trying to save and help at the same time?

Maryalene LaPonsie: It means that parents are often, they’re so concerned with the idea that they’re going to have a 40-year-old living in their basement, that they’re not thinking about the fact that they could someday be a 70-year-old living in their 40-year-old’s basement. Once you hit a certain age, time is not on your side. You can’t be saving for retirement. It’s great to help your kids, whether that’s college or a wedding or a house, but you need to be thinking about yourself, and you need to be putting yourself in a good position, not only for yourself but also to help your kids going forward.

Steve Pomeranz: The savings, the college savings bit, it’s a four-legged stool. First of all, you’re exactly right. You have to understand that they have their whole life ahead of them. You have less than them, let’s just put it that way nicely, so there’s a time crunch on your side and there’s less of a time crunch on theirs. College expenditures can come from your savings as a parent. It can come from some of the work that they do while they’re in college. It can come from student loans. It can come from different sources other than purely you saving the entire amount for yourself, especially if you can’t do both effectively, right?

Maryalene LaPonsie: Exactly. Exactly. People need to also remember they think they’re doing their kids a favor by helping them pay for college or helping them buy a house, but you could actually be doing your kids a disservice. If you aren’t preparing for retirement, I mean you think about long-term care costs and someone who needs to go into a nursing home or they need assisted living, that could cost $100,000 a year easily. If you don’t have money set aside, if you don’t have insurance, your kids are going to be the ones that are picking up that bill. Then they’re not going to be able to save for their retirement, which means that their kids are going to be picking up the bill for them when they’re retired. What you do right now, if you don’t save for retirement, I mean it could affect your grandkids and great grandkids. It’s a spinoff effect that goes for generations.

Steve Pomeranz: I think that’s an excellent point that we really never think about, but the fact that these financial situations can affect many generations hence, where people basically get tied into almost a poverty cycle, or a near poverty cycle, because of decisions that perhaps were made many generations ago. I mean, maybe that’s an extreme way of putting it, but it’s an example just to remember that by, if you’re in retirement and you don’t have enough money and you can’t leave any money behind and your kids are helping to pay your way, then who’s going to take care of them if they can’t take care of their own retirement? The cycle continues. You want to break the cycle and I think that’s what you’re saying.

Maryalene LaPonsie: Absolutely.

Steve Pomeranz: This idea of saving, so there’s numerous ways to save. The way a typical adult saves this day and age is in their 401K if they’re working, or they’re building IRAs, maybe they own their own business, they set up a pension plan for themselves. That’s a very good way to save, or just taking extra money at the end of every month and socking it aside and just building a taxable portfolio of maybe index funds or something of that to try to get some growth throughout the years. Let’s take some of those. In terms of saving for college, let’s start there. What are the best ways for parents to put some money aside for their college-bound children?

Maryalene LaPonsie: Well, one of the best ways nowadays is to use a 529 plan. I know we often think about savings bonds as being a traditional way to save for college, but all states have 529 plans now. These allow parents to put aside money. The parents own the money; they own the account; they name their child as a beneficiary. The money doesn’t have a tax deduction when it’s put in, at least not at the federal level, it grows tax-free, and if it’s used for college expenses or qualified education expenses, it can be withdrawn tax-free. Some states will give you a tax deduction for their particular … If their resident is contributing to their 529 plan, they get a tax deduction. That’s one of the best ways, if you know your kid’s going to go to college, that is a great way to save. It comes with tax benefits. It can count against you in the financial aid formula, so that’s …

Steve Pomeranz: Well, let’s get into that in a minute. Let me just reiterate what you’ve just said which is very important, that the money is owned by the parents. Unlike some other accounts where you’re actually gifting the money to the children and when they turn age of majority, which can be 18 or 21 depending on your state, then it’s theirs to do whatever they want. That has some risks to it. Also, if the child does not go to college, it can be moved to a second child, right?

Maryalene LaPonsie: Absolutely.

Steve Pomeranz: It can be used for education expenses, but if it’s not used for education expenses, the parent can get that money back subject to some taxes and a penalty, right?

Maryalene LaPonsie: Absolutely. You can still get that money out. If none of your kids goes to school, if you don’t have anyone else, you don’t have grandkids, you can pull that money out. You will pay some tax. You’ll pay a 10% penalty on it as well. One exception is if your kid gets a full ride scholarship, then I think there’s provisions that let you take it out tax-free, but most of the part, you will pay that penalty, but it’s better than losing the money.

Steve Pomeranz: Yeah, well that’s it. There’s a degree of liquidity to the money and that’s a powerful financial tool is to make sure that your money is liquid. What do you do if your children come asking for a loan or gift? What do you say for them?

Maryalene LaPonsie: Hopefully, you have thought about this in advance, especially if your kids are getting to the point of being young adults. Hopefully, you’ve talked to your spouse if you have one and you have looked at your budget. You have decided in advance that my child wants to go to college and this is what I can afford. You don’t want to be put in a situation where your child is coming to you and you suddenly feel that guilt like you have to help them or you don’t know, or you just have no idea how much money you can afford so you’re like, “Oh yeah, sure. I can cover that. Don’t worry about it.” A lot of this is part of just looking at when your kids are teens, 15, 16, 17, start keeping that in mind with your budget so that you are not caught off guard when that discussion happens.

Steve Pomeranz: We’re not only talking about college, but we’re talking about a wedding, or we’re talking about them wanting to buy a house. These can be expensive propositions, especially these days. Weddings are incredibly expensive. I guess there’s this tendency to go, “Yeah, I’ll take care of that.” Maybe it doesn’t seem like that much or you’ll figure I’ll pay it out over time or I’ll figure it out, but that can be quite risky and dangerous to your own personal retirement.

Maryalene LaPonsie: Yeah, and it’s tough because you want to say yes to your kids and you want to support them.

Steve Pomeranz: I know, there’s all that guilt, right?

Maryalene LaPonsie: Yes. There’s a lot of guilt involved in being a parent and you think you can make up for all the mistakes by if you can just pay for that great wedding or help them buy that house, but …

Steve Pomeranz: Yeah, because after all, everything is our fault.

Maryalene LaPonsie: That’s the way it feels like sometimes.

Steve Pomeranz: I know it does. It’s like there’s this unwritten requirement to help out, right?

Maryalene LaPonsie: Yeah, but there isn’t. That’s what parents need to remember is that you don’t have an obligation to help and some parents don’t. Some parents are, “You turn 18 and you are on your own.” I tend to think that it’s good to help your kids transition, but you have to decide what is right for you and your family and what is your personal comfort level. Do you want to help your child with college? Do you want to help them with a house? Where do you draw that line? Even if you can afford it, I think parents need to be very aware of the lessons that they’re teaching their children and maybe you can afford to pay all your kid’s college costs and maybe you can afford to gift them a house. You’re doing that well-off. You need to think about what lesson am I teaching my child?

Steve Pomeranz: There’s this thing about having skin in the game. That’s very important. Some people say, “Look, my only obligation is to raise kids to be happy, healthy, and well-equipped to function in the real world,” and that is a great idea, but too much money can kind of subvert that idea to something less desirable. Your desire to help, perhaps your guilt, kind of gets in the way of you doing what’s best for them. It’s ironic, but actually, it seems to be the way it works.

Maryalene LaPonsie: I agree. Parents need to keep all that in mind. It’s really complex. It’s not just a simple mathematic equation of I can afford X and I’m going to give my child that.

Steve Pomeranz: One idea that you wrote in your article is a Roth IRA and I thought it had some positive ideas. You don’t get a deduction for putting money into a Roth IRA, but it does grow tax-free so you can use it for retirement or you could pull it out for college as well. That sounded like a really good idea; the only problem is that you really can’t contribute that much to a Roth.

Maryalene LaPonsie: That’s right. That’s one of the big limitations with that strategy is with a Roth you can only put in $5,500 a year, unless you’re age 50 or older and then you get an additional $1,000 for catch up, so that’s $6,500. Then there’s income limits too. If you’re a single taxpayer, once you hit $118,000 a year, your ability to contribute to a Roth starts to phase out. There are some backdoor ways around that but by the letter of the law, once you hit that amount, you can’t necessarily put in the whole amount.

Even if you start when your child is born, I did the math and for 18 years that gives you $99,000 that you could pull out in your contributions, which sounds like a lot but a lot of private schools are now 30, 40, $50,000 a year when you consider room and board plus tuition. I mean, that’s the sticker price. Hopefully, your child is going to get some assistance so you’re not paying that much, but $99,000 doesn’t get you very far especially if you have multiple kids.

Steve Pomeranz: Not anymore, that’s for sure. We have numerous articles on our website about this subject. We discuss kids. We discuss paying for them and we discuss retirement quite a bit. Go to StevePomeranz.Com to get those articles. Also, don’t forget when you go to the site, make sure you sign up for our weekly update which tells exactly what’s been on the show and gives you summaries to read if you don’t want to listen and gives you all kinds of access to what we’re doing here at the Steve Pomeranz Show. My guest is Maryalene LaPonsie, and she’s a financial writer and we were talking about paying for yourself as an adult and also doing the right thing for your children. Thanks so much for joining us, Maryalene.

Maryalene LaPonsie: Thanks, Steve.