How To Setup Investment Account For Adult Children

[RetiredAt49]

Despite our best efforts, my wife and I attempted to teach our children (now all adults) the value of investing. However, not a single one of them has a 401k, an IRA, nor a taxable brokerage account. For Christmas this year, rather than hand them money or buy gifts - we'd really like to setup an investment account for each of our adult children that they (or we) can contribute to.

Is it possible for us to setup an investment account (one for each of our adult children) that would allow them (or us) to contribute to the account but HERE'S THE IMPORTANT PART, we do not want the child to be able to pull money out of the account and/or sell the investments at will. Not to be controlling but for this act (us given them investment money) to be different than say a traditional Christmas cash handout. Really want to teach/show them the true value of investing where they and we can contribute to the fund each year.

Here are a few ideas I had (welcome more input from you all):

1) Create a taxable brokerage account in our names (mom and dad) for each child so that we have full control over the account but give the child access to deposit money into the account (and setup automatic investing anytime money is available). We would then list them as sole beneficiary of their investment account in case of our death. The only drawback I see here is that we (mom and dad) would be responsible for taxes on dividends.

2) Create a taxable brokerage account in the name of each of our children (and use their SSN, mailing address, etc.) but we don't give them the login information - just the routing/account number so they can contribute to it. Drawback here of course is they could call the brokerage and update login/account details which kinda defeats our purpose of "teaching them the importance/value of investing but not letting them take money out of it"

3) Any other ideas? Is there some type of joint ownership option where both of our names are on the account and both of us need to approve withdrawals - or something like that?

 

[pb4uski]

If you contributed to a traditional IRA for them would the tax on withdrawals and 10% early withdrawal penalty be enough for them to not raid it? That along with no having the access information?

 

[RetiredAt49]

If you contributed to a traditional IRA for them would the tax on withdrawals and 10% early withdrawal penalty be enough for them to not raid it? That along with no having the access information?

Ya know, one would think that the early withdrawal penalty would be enough... but then (assuming we contributed $10,000 to each child) I could see at least one of them say - well, $9,000 (10% less than $10,000) is better than nothing, which is how some of them think.

I thought about going the retirement account route but we also recognize that a taxable brokerage account "could" give them/us some flexibility (e.g. use some of it for a down payment on a house - which we would get behind). Really just want them to get/understand/see the power of investing otherwise we'd just hand them money.

 

[MarieIG]

I seeded Roths for the kiddos - with a 5/6 success rate. Penalties did not stop the one from emptying out all his retirement accounts, however, a wife now has him in hand . . .

 

[yakers]

AFAIK as long as the account is in their name they would have to pay taxes, even an IRA has to be reported. So they would have to have full account information and would be abe to gain access. When sons were younger I would give them $ specificly to put into an IRA. If yours made such a committment would they not follow through?

 

[MichaelB]

There’s only so much one can do and control. OP can set up a Roth, make the contributions and manage the investments. There are income limits so Roth eligibility needs to be confirmed every year. There is no way to prevent withdrawals from an investment account in the name of the adult child.

If OP wants something that cannot be raided, a revocable trust might help. Like taxable accounts, it may generate some taxable income, but OP could manage that without involving the eventual beneficiaries.

 

[pb4uski]

Another idea is to offer to match whatever they save as long as the money stays in there.

So for every $3 you put in up to the annual contribution limit I will reimburse you $1 (or $2) but we have a handshake agreement that it will stay in there for your retirement

If you renege and take it out not and we have not agreed to the withdrawal in advance then not only will you pay 10% early withdrawal penalty to the IRS, you will pay dollar-for-dollar in any inheritance.

 

[SecondCor521]

You can't teach them - and they won't learn - as long as you do it for them and control their behavior.

You'll have to give up control and let them make decisions sometime. If they are adults, now would be a good time to do so.

It's scary, but the only way I know of to teach adult offspring is to have a relationship where you give up control, they can make mistakes, and they feel safe enough and respect you enough to ask you questions and learn from you.

 

[GrayHare]

Based on what I've observed in families, I'm convinced you can't convert a spender to a saver. It is as difficult for a spender to become a saver as it is for the savers here to suddenly become spenders. Any change that does happen is a long, slow process.

 

[FlaGator]

You can't teach them - and they won't learn - as long as you do it for them and control their behavior.

You'll have to give up control and let them make decisions sometime. If they are adults, now would be a good time to do so.

It's scary, but the only way I know of to teach adult offspring is to have a relationship where you give up control, they can make mistakes, and they feel safe enough and respect you enough to ask you questions and learn from you.

+100 The cows are out of the barn.

Every lesson can be taught if the student is willing. Some only learn the hard way.

If they grew up believing mom and dad paid for everything, why wouldn't they think about contributions to their retirement accounts the same way?

Are you trying to teach them to be truly independent or show them a way to be take care of themselves when you are gone or otherwise unable to backstop them?

If you want to put money aside for them now while restricting their ability to withdraw, talk to an attorney about the possibility of a trust for each that you control. This won't teach them how to care for themselves or their future, but you might feel better.

 

[FLSUnFIRE]

Perhaps set up trusts for each children with specific criteria for distribution from the trust. Trust will "pay out X dollars for each dollar contributed and left for X number of years in a 401K/IRA etc" Or matching contributions. Could make it so any undistributed funds can be used only for health/LTC with any undistributed going to charity. Certainly would cost a bit more to set up but I'm considering something along those lines for my nephews and niece... there will be no money until they prove to be financially responsible.

 

[marko]

Perhaps set up trusts for each children with specific criteria for distribution from the trust. Trust will "pay out X dollars for each dollar contributed and left for X number of years in a 401K/IRA etc" Or matching contributions. Could make it so any undistributed funds can be used only for health/LTC with any undistributed going to charity. Certainly would cost a bit more to set up but I'm considering something along those lines for my nephews and niece... there will be no money until they prove to be financially responsible.

+1. What I was thinking. This situation is not much different from your typical "after death" trust setup.

Very specific conditions could be set for payments and withdrawals. We've discussed this option here many times.

You're leaving money to (irresponsible) heirs...you just haven't died yet.

 

[DrRoy]

It would be interesting to know how this worked out years down the road.

 

[Aerides]

You cannot give them the responsibility (taxes) without the benefits (ownership). You can put money in an account in your name, and give them statements showing growth provided you pay the taxes...if you want to treat them like they are 17.

But I think you're going to do more harm than good if you try to have any control. Most reasonable adults would find it at least a little insulting, despite your intentions. I know I would have back when I was in my 20's and not yet saving or doing a 401k. Life was expensive on a small paycheck, and even 3% was a challenge. Eventually I learned on my own once my income got a little better.

 

[sengsational]

I told my nephew that he'd get a much larger graduation check if he put it in a Roth IRA. I tried setting it up myself for him, but there were steps, like drivers license number, that made it hard. So I told him what to do to open the account, and he agreed. I made the check out to Schwab Roth IRA "FBO (nephew)". He took the stack of graduation checks to the bank and deposited them all, including the Schwab one. Then promptly blew the money. I gotta put that into one of those back testers and find out what it would be worth today... that's good Thanksgiving material.

 

[TheWizard]

I told my nephew that he'd get a much larger graduation check if he put it in a Roth IRA. I tried setting it up myself for him, but there were steps, like drivers license number, that made it hard. So I told him what to do to open the account, and he agreed. I made the check out to Schwab Roth IRA "FBO (nephew)". He took the stack of graduation checks to the bank and deposited them all, including the Schwab one. Then promptly blew the money. I gotta put that into one of those back testers and find out what it would be worth today... that's good Thanksgiving material.

Well, it takes a lot of money to buy a BMW...

 

[38Chevy454]

Perhaps set up trusts for each children with specific criteria for distribution from the trust. Trust will "pay out X dollars for each dollar contributed and left for X number of years in a 401K/IRA etc" Or matching contributions. Could make it so any undistributed funds can be used only for health/LTC with any undistributed going to charity. Certainly would cost a bit more to set up but I'm considering something along those lines for my nephews and niece... there will be no money until they prove to be financially responsible.

You could make an irrevocable trust with yourselves as trustees. Needs the kid to agree, and you'll have to do trust returns for as long as the trust exists. Plus dealing with the taxes issue already mentioned.

I have to agree, you have tried teaching adults, but they will ultimately only do what they really want to.

 

[Sojourner]

Despite our best efforts, my wife and I attempted to teach our children (now all adults) the value of investing. However, not a single one of them has a 401k, an IRA, nor a taxable brokerage account.

And they never will. They are grown, fully formed adults. It is utter folly to think they'll suddenly change their ways at this point because their parents told them to.

HERE'S THE IMPORTANT PART, we do not want the child to be able to pull money out of the account and/or sell the investments at will. Not to be controlling but for this act (us given them investment money) to be different than say a traditional Christmas cash handout. Really want to teach/show them the true value of investing where they and we can contribute to the fund each year.

With all due respect, you are living in a fantasy world if you think this is doable. You tried your best to teach them earlier in life the value of saving and investing, and it didn't work. What makes you think it will work now? They have to be willing to learn and to truly want to change their ways. Trying to turn a content spender into a saver is probably about as hard as turning a devout Catholic into a Scientologist.

 

[Chuckanut]

And they never will. They are grown, fully formed adults. It is utter folly to think they'll suddenly change their ways at this point because their parents told them to.



With all due respect, you are living in a fantasy world if you think this is doable. You tried your best to teach them earlier in life the value of saving and investing, and it didn't work. What makes you think it will work now? They have to be willing to learn and to truly want to change their ways. Trying to turn a content spender into a saver is probably about as hard as turning a devout Catholic into a Scientologist.

I do the Daddy Match up to $3000 a year for my kids. They understand if they pull money out of the IRA account for any reason, the match ends permanently.

And I will probably go Skiing a lot more than I do now. SKI - Spending the Kids Inheritance.

 

[SnowballCamper]

My initial response was that you can't give them something and control what they do with it. Then it isn't really a gift. DW suggested what pb4uski said (matching contributions), and that's probably as good as you can get without the hassle of a trust.

Are the kids making enough to be able to save? I wasn't in a position to save much until my mid-late 20s.

 

[Stormy Kromer]

If your kids are going to spend your money the way you don't want them to they will do it when you are alive or dead. Your choice.

 

[JBTX]

If you have their information you can set up accounts in their name, but I don’t think you are really legally supposed to. Regardless it will be their account. It should have their address and they will get statements. I set up a Roth IRA for a young adult child and she found out about it and promptly liquidated it.

Yes, a trust would work, but it seems like an expensive way to do it. Couple of thousand to set up, then will have annual tax returns. Plus earnings that are left in the trust (not distributed ) are taxed at trust tax rates which are accelerated vs individual tax rates. Trusts certainly make sense when you die, or perhaps other situations where you don’t want the money to stay in your name (like estate tax) but otherwise this seems like an expensive approach to take.

 

[sengsational]

Well, it takes a lot of money to buy a BMW...

Funny you should say that. Not too much later, he was driving a BMW (leased )