Would you contribute to your kid's 401K ?

[targatom2019]

I am 48 and will only work 2 more years with around 5M in assets with ZERO debt. My daughter just graduated from UCLA making around $82,000 with ZERO debt and will participate in the nurse pension program(max out $8,000). She also has a 401K program but the standard of living is so high in West LA that if she maxes out then she will not have a penny left each month. My plan is to have her maxes out her 401k and I will give here a monthly miscellaneous spending so she can get her in a lower tax bracket.

Is this a right thing to do or does anyone has a better plan ?


Thanks

Tom

 

[Z3Dreamer]

Your math sounds good, but side issues are important. When I was advising youngsters, just into the work world, it made no sense to build up a 401k if they had not built up enough cash for a downpayment on a house.

The big spending thing for parents of 20 something ladies is "the wedding". How you gonna feel when after a few years of paying these 401k subsidies, she wants Daddy to fund an $xxx,yyy wedding.

Congratulations on getting her through school and into the working world with no debt. At this point, I would want to distance myself from the stresses of her finances, but you are getting deep into it. I might fund a few years of Roth but not give her monthly miscellaneous spending.

 

[SecondCor521]

When my kids and I were going somewhere in my four door sedan one time, we saw a guy blow past us on a motorcycle about 25 mph above the speed limit, wearing no helmet, no leathers, and smoking a cigarette.

I had the presence of mind to say to my kids, "He's optimizing a different variable." Meaning he was - in my opinion, anyway - prioritizing fun and excitement over longevity. Often the variables can conflict.

Many here want to maximize family wealth - which your plan certainly moves you toward. Many here also want their kids to be independent young adults; depending on your relationship with your daughter your plan might move you away from this. It does sound like you feel like you will be fine financially even with the gifting, so that isn't a concern.

The only thing I'd point out is that the 401k max is $18,500 this next year, and the annual gifting limit is $14,000 IIRC. So if you fully funded her 401k contribution, you'd either have to have your spouse give her some or file a gift tax return. Or fund $14k of the $18.5k, or technically violate federal tax law - which you might want to avoid if you're high income because you might be audited or if it bothers you ethically.

Good luck!

 

[targatom2019]

Sorry, I did not my self clear. She is my only child and she is fugal but west LA is so expensive that she and her room mates each pays $1,300 per month for an ok condo. She is turning 22 and I want her to max out her 401k ASAP with her monthly checks first so she can be in a lower tax bracket and maybe she will get a nice tax return. From breaking down her monthly budget, she needs around $300 from me if she maxes out her 401k.

 

[Katiek]

I don't have any children, but when my nephew got his first job, I gave him some money to incent him to use his income to open an IRA. I don't intend to continue this forever, but I thought it would help to at least have an account started and get familiar with the concept.

If you can afford it, and your kid is responsible about money, i think it's a nice gesture. Although you may want to be clear that it's for this year and may not continue so she doesn't assume she's entitled to the money and plan her lifestyle accordingly.

 

[SecondCor521]

Sorry, I did not my self clear. She is my only child and she is fugal but west LA is so expensive that she and her room mates each pays $1,300 per month for an ok condo. She is turning 22 and I want her to max out her 401k ASAP with her monthly check first so she can be in a lower tax bracket and maybe she will get a nice tax return.

I understood you perfectly in your OP and here. One thing that isn't clear is if you are motivated by (A) having your daughter avoid the pain of west LA economic realities, or (B) helping her gain wealth as rapidly as feasible, or (C) both.

If what I wrote didn't sink in, you may want to read the book "The Millionaire Next Door", then write an explanation why you are not providing Economic Outpatient Care to your child. (It sounds like you are.)

I'm not trying to be mean. I'm a parent of a 22 year old and struggle with the same issue.

 

[Meadbh]

So, she’s a new Nurse, earning $82,000 per annum, paying $15,600 (19% of her income) in rent. Let’s say she pays 30% in taxes, that’s $24,600, leaving her with $41,800 for food, clothing, savings and entertainment. That looks totally doable to me. Why not let her get on with being an adult?

 

[gauss]

Why does she have to contribute the max to the 401k the first year out?

Why not start at 10% and them ramp up 1% each year with raises until she hits the max? (FWIW that is basically what I did and I was FI by ~47 years of age--including after tax savings)

This may be a good way for her to further reinforce the attainability of long term goals when she owns them.

Probably more useful as others have said to expose her to concepts such as "The Millionaire Next Door" so that she can challenge the messages that Madison Ave is constantly bombarding her with instead of just gifting her because you can

-gauss

p.s. I was originally going to suggest that she get a roommate, but I see that is already the case.

+1 to that!

 

[MichaelB]

Retirement math heavily favors those that get an early start on saving and investing, so there's good reason to want to help with the 401K.

We've done something similar, but the way I do it is to transfer funds directly into their Roth IRA., and only after verifying that they are contributing meaningfully to their own retirement plans.

I think just about everyone has a tough time getting started. Learning to make choices early on is am important part of maturing and also a critical success factor in financial achievement in life.

 

[RockyMtn]

I contribute to my kid's Roth for a couple of reasons:

1. He barely makes enough to survive. I know cause I do his taxes. If I didn't contribute he couldn't afford it.
2. I can afford it and I also have a future estate tax problem. Funding his Roth now is better than giving it to the tax man later.
3. It is helping him understand investing, diversification, etc which will be important down the road when he gets a chunk of $$$.

 

[gauss]

By chance, I took a Retirement Planning course offered by my GF/DW's employer very early in our careers. It was educational and not a sales pitch.

I quickly picked up on the exponential returns offered by market investments. Having a background in systems science/engineering, I was well versed to run my simulations etc.

I quickly realized that front loading investments early in my life would effect the very steep portion of the exponential curve near the end of my working career. As a result, I didn't buy a boat (sorry boaters) and tended to minimize expenses from that point forward.

I guess my point is that I was very fortunate to receive this information in a form that I could relate to, and at a point in my a career (early and before expensive spending habits set in) that was very advantageous.

I wish I knew how to "bottle this formula" and share it with young people so that they could also benefit.

-gauss

 

[REWahoo]

Would you contribute to your kid's 401K ?

We made sure they were debt-free the day they got their undergraduate degree. To my way of thinking that's a huge contribution to their 401k.

 

[Big_Hitter]

Why not let her get on with being an adult?

+1

 

[EvrClrx311]

Story that ties into this... in my mind at least.

I was a very good runner in HS, and decided to carry that into college along with tackling an engineering degree. I remember my father throwing out a very good question, one I didn't fully appreciate at the time... "Are you preparing to be an Engineer or a professional runner?" Running to me, and competing was a religion of sorts, and at the time I had all kinds of justifications to continue in it (it keeps me challenged and forces my to struggle and balance life, in a positive way). It took me 3 years to figure this out on my own, what my father really meant. The workload of getting my degree while trying to train and complete (5+ hours a day and weekends for travel to compete) just didn't work when I got to the higher level courses. I tried doing minimum course load (keeping an B+ average) for two years to stay above it all... it was difficult and I knew it would keep me in college an extra year. I just never told my parents that, until 3.5 years in.

My 4th year I stopped the running, focused on graduating, but at that point it was going to take me a 5th year. My parents had the ability to cover this, but I remember the summer before my 5th year when my father told me I'd be covering my final year of school myself. At the time I felt a bit mixed about this (entitled... somewhat?) it wasn't something I had planned for. I didn't dare argue with him, but I remember thinking it wasn't fair, and keeping that thought to myself. As a 21 year old, my plans involved my comforts. All I'd ever known was my parents covering college. We grow up and lived modestly, but I always assumed (knew?) they'd cover my school, because they did. Until they didn't.

Whoa is me, right? No... I look back at this as being one of, if not the most valuable things I ever learned from my dad. Not only did I get straight A's that final year, but I appreciated every single cent I had to borrow to pay for the final year. Something I had no appreciation for, until that 5th year. My point isn't about the specifics of finances... but about the lessons we take from struggle. And struggle is a very relative thing, in life - it builds character. When someone is forced to do something on their own... it sticks in a different way. I worked more that year, because I wanted to get rid of this debt as soon as I could. And I tackled that debt when I entered the working force. I grew to appreciate having it, and tackling it on my own. Knowing what it represented. And there is the key point to this post... I did n't appropriately appreciate my parents paying for my college, until that 5th year. At the time, I would have said I appreciated it, but the reality is... when we get something for free, we can lose sight of that. Because it's just there, you can rely on it. The key to growing up is learning to rely on ourselves. I love the way my parents managed that with my siblings and me... to this day I know if I really mess up I can turn to them, but they instilled values and lessons and expect us to now live our lives the way we want.

Being a parent myself now, I find myself searching for ways to inject this kind of lesson for my daughters. I have the means to give them very comfortable lives, but I also want them to learn to appreciate things.

Covering 401(k) payments is logical, and I can think of all kinds of reasons this is an extremely value way to pass wealth to a child... however the best gift we can give them isn't tangible. Sometimes, I think FI can inadvertently shoot themselves in the foot by providing "easy" solutions for their kids. It comes form the heart, and mind... in order to combat this I try to step back and think about how my child might feel, think, or learn from what I'm doing. If they aren't following and appreciating the result of the guidance/help... then the training wheels provided may actually be having an opposite effect.

It's interesting to talk to my parents about this period of time in my life, and how they struggled with the decision to have me pay for my final year in school. It went against their philosophy, their life plan to cover school for the kids as a means to let us enter the world debt free... but I think my father had this insight, to pass this lesson on to me, because he recognized I didn't appreciate what they were doing for me, as he saw me plan a 5th year in school just because I could (or I had decided to). He was right. Human nature... path of least resistance. Back to the message about struggle...

 

[Mdlerth]

Tough question...

You know your daughter and we don't. If you are sure your assistance will encourage constructive behaviors, then go ahead.

But you better be sure. There is a danger of backfire. My parents gifted each of their two daughters upwards of a half million over the past two decades, and all it did was breed dependency. Now Mom & Dad are in memory care and the money spigot has ended; my sisters are not taking it well.

I think the most valuable gifts we give our kids are virtues. Prudence, patience & perseverance are worth far more than property.

Good luck, although it sounds like you don't need it. Congratulations on your daughter's graduation and employment. May she bring health and comfort to many.

Edit: After I posted this I saw Evrclrx's note just above mine. Had I seen that one, I'd have just said "+1".

 

[Sojourner]

... You may want to read the book "the millionaire next door", then write an explanation why you are not providing economic outpatient care to your child.(it sounds like you are.)

+1

... So, she’s a new nurse, earning $82,000 per annum, paying $15,600 (19% of her income) in rent. Let’s say she pays 30% in taxes, that’s $24,600, leaving her with $41,800 for food, clothing, savings and entertainment. That looks totally doable to me. Why not let her get on with being an adult?

+1

 

[Huston55]

So, she’s a new Nurse, earning $82,000 per annum, paying $15,600 (19% of her income) in rent. Let’s say she pays 30% in taxes, that’s $24,600, leaving her with $41,800 for food, clothing, savings and entertainment. That looks totally doable to me. Why not let her get on with being an adult?

+1. It does look very doable for her, even though maxing it out each year might be a bit of a struggle* for a few years.

* Per several posts above, the struggle is very valuable.

However, if you want a middle ground, you could try something like this: Tell her you’ll match her 401k savings $ for $. You’ll both learn several important things from that: does she value it, what are her priorities, is she willing to make the sacrifices necessary for later benefits, what are your/DW’s motivations for helping her, etc.

 

[joeea]

Is this a right thing to do or does anyone has a better plan ?

Has she asked for your help?

Has she indicated that she isn't able to save for retirement on her own?

 

[sengsational]

If the contributions will lead your daughter to any additional spending, then I'd not do it. As the "Millionaire Next Door" comment indicated, you won't be doing her any favors because the dependency will probably cause her to be living a little above her own capacity, and so, when you quit paying, she'll be in a situation that makes saving more difficult.

On the other hand, if you open a Roth in her name and say you might put a little money in there for her, and she ignores it completely (doesn't cut her own saving rate), then it gets that "early saver" boost. You know what they say about compound investing...the first 100 years are the hardest.

 

[iloveyoga]

You are very wealthy, but I would still let her do it on her own, I agree with many of the reasons listed here. IMO.

 

[exnavynuke]

Sorry, I did not my self clear. She is my only child and she is fugal but west LA is so expensive that she and her room mates each pays $1,300 per month for an ok condo. She is turning 22 and I want her to max out her 401k ASAP with her monthly checks first so she can be in a lower tax bracket and maybe she will get a nice tax return. From breaking down her monthly budget, she needs around $300 from me if she maxes out her 401k.

So, she’s a new Nurse, earning $82,000 per annum, paying $15,600 (19% of her income) in rent. Let’s say she pays 30% in taxes, that’s $24,600, leaving her with $41,800 for food, clothing, savings and entertainment. That looks totally doable to me. Why not let her get on with being an adult?

Yeah, I must be missing some major budget items of hers or vastly underestimating them. Sure, LA is expensive, but most of that HCOL is due to housing which, at $1,300/month, she isn't paying an exorbitant amount for. Even if we subtract $18k for 410k contribution out of that $41.8k, she would still have almost $2,000 per month to spend on the rest of her bills plus entertainment each month - which is more than reasonable for most people her age.

 

[RunningBum]

I feel like the choice is a personal one. You don't have to let The Millionaire Next Door book make the rules. It's a good book but I'm never going to do everything it says.

You know your daughter best. Most likely by now if she's financially responsible, making up for her 401K contribution won't change that. Likewise, if she's not, withholding the money probably won't change anything either.

 

[pb4uski]

I am 48 and will only work 2 more years with around 5M in assets with ZERO debt. My daughter just graduated from UCLA making around $82,000 with ZERO debt and will participate in the nurse pension program(max out $8,000). She also has a 401K program but the standard of living is so high in West LA that if she maxes out then she will not have a penny left each month. My plan is to have her maxes out her 401k and I will give here a monthly miscellaneous spending so she can get her in a lower tax bracket.

Is this a right thing to do or does anyone has a better plan ?


Thanks

Tom

I think that is fine. From what you wrote it sounds like the nurse pension program is contributory... so she is already saving $8k of her $82k in earnings? Also, does the 401k match? Does it have some decent low-cost investmetn options?

Perhaps what you might do is offer to match any retirement savings that she makes 100% with the stipulation that the match also go into retirement savings. That way, she can max out her 401k and pension but your match will help her towards her living expenses and it will reduce your estate.

 

[Danmar]

It all depends on your kid and your relationship with her. I have helped my only daughter out a fair bit. My view is that struggle is overrated. But I understand and appreciate the alternative view.

For instance the real estate market in Toronto is very expensive. Without assistance from a parent, most young people would be limited to living in an apartment. So I gifted her enough for a down payment. She and her husband are hard working, sensible, financially responsible young people. She doesn’t act entitled. If I thought this assistance would ruin her work ethic or ambition, I wouldn’t give it. I figure if you have done a good job of parenting and showing a good financial example, the chances are slim a little financial help would “ruin” them.

In the end she will inherit the vast majority of our wealth. Seems less than optimal to wait until we are dead to give some of it to her. We can easily afford it now. Go with your instincts.

 

[Danmar]

I feel like the choice is a personal one. You don't have to let The Millionaire Next Door book make the rules. It's a good book but I'm never going to do everything it says.

You know your daughter best. Most likely by now if she's financially responsible, making up for her 401K contribution won't change that. Likewise, if she's not, withholding the money probably won't change anything either.

+1.