savings (gift) account for adult children

[tulak]

I'm letting my (barely) adult children live with me until they have enough saved in order to buy a home. I'm collecting a trivial amount of money from them every month. I don't need this money and I'm planning on giving it back to them once they move out. They don't know that I'm planning to do this and I'd prefer for it to be a surprise.

In the end, it probably won't be much money, since the amounts are not large, but I figure it could help with furnishings, etc, once they move into their own space.

My question is around the logistics of how to do this?

I'm thinking of opening up separate accounts for each of them at a brokerage house and buy a total US index fund each month. The accounts will be in my name and then I will transfer (gift) the account to them once they move out.

Any downsides to this approach? Any other ideas?

I realize that I'll have to be careful of gift taxes, but I doubt the amount will exceed 15k total. And if it does, I could spread it out over a few years. From what I've been able to determine, the cost basis transfers with the gift, since I'll transfer the funds. I'm hoping that if we stay at the same brokerage, this will transfer cleanly to a new account so they don't have to track the cost basis?

And if the value of the fund has a loss, then my plan would be to sell it, takes the capital gains loss for myself, and transfer them the cash (and possibly make up the loss).

Anything else that I should take into consideration?

Thanks in advance for any advice.

 

[SnowballCamper]

Any other ideas?

My thinking is to fund the Roth IRA for DD as soon as she has earned income. The current limits put it under the gift tax exclusion. It is really hard to save when starting out, and to see the benefits. By gifting directly into the Roth, it is much harder to spend frivolously (but of course possible by a return of contributions). I see this as a teaching gift...completely transparent, and then when DD has excess disposable income she'll be able to see what would have happened had she saved from the beginning and hopefully be motivated to continue with her own money.

 

[OldShooter]

... In the end, it probably won't be much money, ... I'm thinking of opening up separate accounts for each of them at a brokerage house and buy a total US index fund each month. The accounts will be in my name and then I will transfer (gift) the account to them once they move out. ...

Sounds way too complicated for me. I would just maintain a spreadsheet showing monies received and totals. For small amounts I would not bother to segregate the money or try to invest it. Plus, equity investments should have a relatively long time horizon in order to absorb the gyrations of Mr. Market. I also wouldn't worry about gift amounts or reporting; this is minor stuff. Actually the economic value of the housing above your "trivial" rent charge may be closer to being a reportable gift but I would not bother with that either.

 

[MichaelB]

I think the OPs plan is generous, and will be a very nice surprise for cash strapped kids when they are moving out.

We also have gifted via Roth IRA contributions. There are many ways parents can help their kids set out on their own.One positive aspect of the plan to save the rent paid and give it back is it clearly is a one time gift, and should not lead to any expectation of similar future gifts.

 

[Crewer]

DS lived with us until he and his GF bought a home earlier this year. We didn't charge him much but the gift toward a higher down payment was very much appreciated and may be why they got the house in this hot market. Now that he's out, I miss him! (But do not miss making sure I don't hit his car in the driveway.)

 

[tulak]

My thinking is to fund the Roth IRA for DD as soon as she has earned income. The current limits put it under the gift tax exclusion. It is really hard to save when starting out, and to see the benefits. By gifting directly into the Roth, it is much harder to spend frivolously (but of course possible by a return of contributions). I see this as a teaching gift...completely transparent, and then when DD has excess disposable income she'll be able to see what would have happened had she saved from the beginning and hopefully be motivated to continue with her own money.

This is a good idea, except they are lucky and able to fully fund Roth IRAs.

Sounds way too complicated for me. I would just maintain a spreadsheet showing monies received and totals. For small amounts I would not bother to segregate the money or try to invest it. Plus, equity investments should have a relatively long time horizon in order to absorb the gyrations of Mr. Market. I also wouldn't worry about gift amounts or reporting; this is minor stuff. Actually the economic value of the housing above your "trivial" rent charge may be closer to being a reportable gift but I would not bother with that either.

Maintaining the spreadsheet would be more work for me. I can setup accounts and set auto-transfers each month and completely forget about it until they move out. This reminds me of running Bank of Dad when they were younger. For the first few years I did this using a spreadsheet. I was very happy when we opened up checking accounts with a debit card and then I transferred a fixed amount every month. No more having to play the part of debit card and track individual transactions. The only part I had to calculate was how much interest they were going to get each month, but that was worthwhile because it gave me a chance to look at their spending.

I think the OPs plan is generous, and will be a very nice surprise for cash strapped kids when they are moving out.

We also have gifted via Roth IRA contributions. There are many ways parents can help their kids set out on their own.One positive aspect of the plan to save the rent paid and give it back is it clearly is a one time gift, and should not lead to any expectation of similar future gifts.

Thanks Michael. I figure my kids will eventually get it all when I'm gone, so I might as well help them out now if I can. It'll help them more now and I can take pleasure to see them get a strong financial start in life.

DS lived with us until he and his GF bought a home earlier this year. We didn't charge him much but the gift toward a higher down payment was very much appreciated and may be why they got the house in this hot market. Now that he's out, I miss him! (But do not miss making sure I don't hit his car in the driveway.)

I suspect I'll miss them too, but yeah, there will be certain things I won't miss. I'm actually happy they are living here, since I'm gone a good amount and it's better than having my place empty.

Thanks for all the feedback. I think I'll go with my original idea and open accounts with automatic transfers/purchases.

 

[RE2Boys]

My question is around the logistics of how to do this?

I'm thinking of opening up separate accounts for each of them at a brokerage house and buy a total US index fund each month. The accounts will be in my name and then I will transfer (gift) the account to them once they move out.

Any downsides to this approach? .

Any income would need to be reported on your personal tax return each year.

 

[RE2Boys]

You could also receive your federal tax return refund in the form of I-bonds and have them registered in your kid's name. You could hold the paper bonds until you are ready to give them to you kids, just be sure someone else knows about them and can pass them along.
See: https://www.treasurydirect.gov/indiv/planning/plan_gifts.htm

For whatever reason, my Dad was buying paper EE bonds several years before he passed away rather than investing his money in CDs (around 1990). He had my name and SSN on them as the owner (he was secondary) After 30 years of compound interest at 4%. They have grown in value. In 2023 the last of those old bonds reaches maturity.

 

[albireo13]

I have an adult son who has been struggling getting a career started. We have helped him out but, would now like to do this by contributing to an IRA account for him, preferably Roth. He currently has a Roth started with a minimal balance.
I was thinking of contributing directly to that. I am thinking of doing this occasionally, for birthday gifts, Christmas, etc. I am thinking that contributing to retirement savings is more meaningful than just giving "stuff" or cash as gifts.

Anyway, any complications in doing this?

 

[VanWinkle]

I have an adult son who has been struggling getting a career started. We have helped him out but, would now like to do this by contributing to an IRA account for him, preferably Roth. He currently has a Roth started with a minimal balance.
I was thinking of contributing directly to that. I am thinking of doing this occasionally, for birthday gifts, Christmas, etc. I am thinking that contributing to retirement savings is more meaningful than just giving "stuff" or cash as gifts.

Anyway, any complications in doing this?

None if he has income that supports the amount you put into his Roth within the yearly limit.

 

[youbet]

I have an adult son who has been struggling getting a career started. We have helped him out but, would now like to do this by contributing to an IRA account for him, preferably Roth. He currently has a Roth started with a minimal balance.
I was thinking of contributing directly to that. I am thinking of doing this occasionally, for birthday gifts, Christmas, etc. I am thinking that contributing to retirement savings is more meaningful than just giving "stuff" or cash as gifts.

Anyway, any complications in doing this?

1. He can take it out anytime he wants.

2. If you're closely monitoring, making the decisions, etc., it won't be as meaningful as if you try to stay arm's length after the gift is made. I do it this with the grand kids by going with them to open an account, giving myself full power of attorney and just having a brief review of investment performance with them from time to time.

I like Roth's for kids / grand kids. I like to open them at a full service brokerage so we can invest in most anything we want to learn about. Bank/CU IRA's aren't as flexible in that regard.

 

[The Cosmic Avenger]

I think it depends on how you're collecting the money from them. When my parents did this with me, I gave them cash, and they kept it in an envelope that they gave me when I moved out. If it was PayPal or Venmo, you could just keep the money in there, but otherwise I would just put it in my main checking or a separate savings account, and note the month that each child started paying. (I'm assuming it's the same amount every month, so it would be trivial to figure out each child's total contributions when they move out.) To me, investing is for the long term.

 

[albireo13]

He has a Roth already, index fund with Vanguard. It has been static, since he has been living month to month.

I figure putting deposits into it ... $100 here, $100 there .. to help slowly build his nest egg at least. I will be hands off.