Rich Girl Roundup: How to Save for Your Kids' Future

Katie: I'm gonna charge my 10-year-old rent. Be like, “Ain't no free lunch, honey.” 

Henah: You know what, Rosie, my dog? “You're gonna have to start paying up. You gotta earn your keep.” 

Katie: Yeah, Sam's looking a little nervous. 

Welcome back, Rich Girls and Boys, to the Rich Girl Roundup weekly discussion of The Money with Katie Show. I'm your host, Katie Gatti Tassin. And every week, Henah and I are gonna break down an interesting money topic. we are now dropping the suckers on Mondays, so thank you for choosing to start your week with us.

Before we get into it, here is a quick message from our sponsors. 

Henah, how are we doing today?

Henah: I'm good. It's raining outside so I have my emo hat on, but I'm in my feelings. But it's okay. How are you? 

Katie: You're in your pop punk era. 

Henah: I am. 

Katie: Oh, I'm good. Well, this week's question asks how one can save for their child's future, and I feel like this is kind of a big one, so let's get into it. Do you wanna read the question?

Henah: Sure. So this question is from Jen J. They said, “I just had a baby.” Congratulations to you. 

Katie: Congratulations. 

Henah: “What's the best way to save for her future? We're working on an emergency fund and learning to invest, but I'd like to start some money growing for her, even if we're just contributing a small amount each month right now.” 

And I really love how thoughtful this question is. So kudos to you, Jen, on even approaching this topic. The interesting thing about this question is, we can kind of break it down into your day-to-day way to save, your medium-term way to save, and then the long term. And I will definitely be deferring to you, Katie, on the long term, 'cause I don't know…

Katie: Oh goody.

Henah: …shit about shit on 529s and all that. But there are so many different ways that you could approach saving for your kid’s future. So we actually have done a Rich Girl Roundup on talking to your kids about money, which I think is a really valuable one. 

Katie: Oh yeah. Wait, I totally forgot about that. 

Henah: Yeah, I think it was one of the first ones we ever did. 

Katie: Oh, what a bop. 

Henah: So we'll link it in the show notes, but obviously having the conversation and talking about money, getting them used to money, is something that you can do early on. But then I think the other piece is building in the practical, real-life application. And so on a day-to-day basis, it could be you're saving cash on the side or change or whatever, and then you're kind of teaching them about how that's a baby step toward saving for small goals, or just to have, you know, a fund to start with.

Katie: You know what I love? Can I add something here? 

Henah: No. Yes, go ahead. 

Katie: I knew someone that told me that they would match their kid’s contributions to their own savings. So they set up the savings account for the kid, but then to incentivize them they’d be, “For every dollar you put in, I'm gonna put in a dollar, too, so you're gonna get twice as much.” And I thought that was really fun because it allows you to kind of help them. Obviously your newborn child's probably not coming into a ton of money in their day job yet, but as they get older and you're trying to really incentivize them to save and kind of get into that habit, I think that's kind of a fun way to almost cosplay the employer match thing and get them used to it.

Henah: I think so too. 

Katie: But not just like, “Hey, here's 50 bucks—don't spend it all in one place.” 'Cause obviously that's not really the same thing. It doesn't really teach them anything in that sense. 

Henah: Did you see the story of the parents who accepted rent from their kids? They were older. And then they actually just saved it in a fund for them and then surprised them with it later. And I think that is so sweet. 

Katie: I love that.

Henah: And can make such a huge difference if that's something where you're able to do that and get away with it, like you don't need the money for something else. 

Katie: I'm gonna charge my 10-year-old rent. Be like, “Ain't no free lunch, honey.” 

Henah: You know what, Rosie, my dog? “You're gonna have to start paying up. You gotta earn your keep.” 

Katie: Yeah, Sam's looking a little nervous. 

Henah: But I think that's definitely an option. I love that idea. I think allowances and opening a savings account for them really early. So when I was in high school, I had already kind of opened one with my parents, but they also helped me get a debit card, and that really helped teach me a lot about how immediate money can be. 'Cause I think with a credit card you're kind of like, “Okay, I'm gonna worry about that next month” or whatever. But when you're a kid and you don't have a ton of money, having a debit card can be really helpful. And my cousins, they actually have set up debit account cards for their kids where they can monitor how much goes in every month and see how they're spending, and it shows them trends and it shows them best practices, and I think that that's really cool and something we didn't have growing up.

Katie: Yeah, I know.

Henah: Something we didn't have growing up 'cause we're old.

Katie: Back in the day.

Henah: Back in our day. But that could be a really useful tool, too, as your child is getting older, to kind of teach 'em about those things. Obviously they just had a baby, so we're… 

Katie: I have one more for teens on the day-to-day that I think is great, and yeah, Jen, you've got plenty of time. But I had a friend in college whose parents, they gave her a credit card. I don't know if it had a certain limit or if they just told her it had a certain limit, but in any case they helped her get a credit card that way. She started building credit in college and then when she graduated and was having to get a rental unit and had to apply for her own credit cards, she had some established credit.

And I guess in retrospect, my parents kind of did something similar, because I had a Shell credit card for gas that I think…I could be mistaken, but I'm pretty sure it only bought gas, or again, maybe they just lied to me and told me it only bought gas. But it was really just for me to fill up my car and then they paid it off, but it was in my name. So when I applied for my first credit card, it was like, oh, I already had a good credit score. And I think that that's one where it actually might not cost you anything incremental to do that. It's just adding their name to a card you already have. I think that makes a really, really big difference. 

Assuming, of course, you are using credit responsibly, 'cause I've also heard the opposite, where someone was on their parent's credit card and the parent got into a lot of debt and inadvertently ruined their child's credit score.

So none of this is foolproof, but it is a little bit of a strategy or a hack that might be an easy way to help your kid just get a little bit ahead or to smooth that transition. 

Henah: Yeah, I think it's a great point. I just saw a tweet this morning that was like, this woman gave her kid…

Katie: Oh gosh. 

Henah: …her credit card info for buying something… 

Katie: Oh god. 

Henah: …off DoorDash. And then it turned out that he bought $2,500 of DoorDash in a month, and she didn't realize, and they found out about it. So yeah, it could go either way, but I think it's a really valuable tool if you could… 

Katie: Okay. Can I just say that I had friends in college that had credit cards that their parents paid off and the amount of times that it was like, “Oh they won't notice, they won't look at this.” I'm like, “Let me tell you something. If I make one purchase on a credit card that my mom has the account information for, I am gonna get a phone call in no more than eight minutes.”

Henah: Oh, yeah.

Katie: There was no sneaking anything past them. So I was so jealous of my friends whose parents were so laissez-faire about it, 'cause mine definitely were not. 

Henah: Mine weren't either, but I get it now, because if I spend anything and then I open my credit card later, I'm like, “Who did this?” And I'm like, “Oh, me. Me. I did this.” 

Katie: I've been defrauded. Oh my god. 

Henah: There's also other probably more formalized options. Like I know CDs for kids are big. I think you could do HSAs for kids. Trust fund, can't relate. I have no idea how that works, but I hear that's an option. Katie, do you wanna talk maybe a little bit about the more long-term?

Katie: Yeah, let's talk tactics. Everyone, let your eyes glaze over; we're gonna talk about accounts. All right, well, I think… 

Henah: Now that my fun part is over, we'll get to the boring…no, I’m just kidding. 

Katie: Yeah, now she's punting it to me for the snoozer, the snoozefest. Okay. The overarching theme that immediately came to mind for me when I read this question was this idea that I think when people have kids and they are maybe not themselves in a position that is financially fortified as they would want to be…now, that can look different for everybody. But let's just say you're maybe behind on your own goals. I understand the temptation to be like, “Well, I'm hopeless for myself, or I've kind of given up on my own hopes of hitting these goals, but I can make it such that my kid definitely hits them.” That's a very common experience, I think, 'cause they're like, “Oh, this kid has so much time. Let me start really early for them 'cause I didn't start early for me.” 

And I've listened to a lot of financial planners talk about this. There are no student loans for retirement. If your own retirement or your own future is underfunded, it is far more important for you to put on your own financial oxygen mask first, which might go against your instincts as a parent, but is ultimately still going to be the best thing for your kids later, because it means that they won't have to support you later in life.

So I think it's a really important thing to always remind people that yeah, it's obviously great if you can give your kid a head start or if you can send them to college without loans. Everybody would love to do that for their children, no doubt. But ultimately your own future and your own retirement, you have fewer options for that than they do for things like education later in life or even just for building wealth later in life. They're gonna have their own chance to build wealth, too. 

So I think if your own retirement is on track, those goals are on track, and you're just looking for the best ways to save for your kids' future as part of those goals, the most popular account that often comes to mind is that 529 plan. And it does have some great benefits. So the money inside the 529 is gonna grow tax-deferred, and your distributions are gonna be tax-free if you're using them for those “qualified education expenses.” Which typically includes things like college tuition, fees, books and supplies, some room and board. And if your kid is going to some fancy private school, you can pay up to, I think, $10,000 per year in K through 12 tuition. And I believe there's also some repayment ability for student loans, like up to $10,000 per beneficiary. So there might be some almost nearer-term purposes that you wanna have.

I actually found myself wondering, could someone open a 529 for themselves, contribute to it, and then use it to pay off their own student loans? Theoretically I think you could, but… 

Henah: The loophole… 

Katie: The loophole. 

Henah: But so is this basically the HSA, but for education? 

Katie: Mm, it's a good analogy. I would say yes, but the difference is that there's no tax break up front at the federal level. But some states will give you a tax break so you won't have to pay state tax, or you'll get some sort of state tax break on the contributions you make. Whereas the HSA, I think all states except for California and New Jersey—ha, the two states you've lived in… 

Henah: The two states I live in, yeah.

Katie: You'll basically not pay your federal or state taxes on HSA contributions. And ultimately, if we're gonna get really in the weeds, eventually your HSA becomes more flexible. At 65 it becomes an IRA. The 529 doesn't have an equivalent “Oh, at such and such age, if you don't use it all, it converts.” So, you know, you're giving up some flexibility there, and I do think that I can make a case for it being far more appealing in states with higher income tax rates. There's also no annual limit, but there's a maximum aggregate limit, which varies by state. And so in doing some quick research, it looks like it varies from between mid-$200,000 range to mid-$500,000 range, where that is the maximum you could have in it before you get cut off. So that's worth knowing, too. 

And this is, I think the big thing with the 529 as an account is that to me, the benefit of this one and why you actually might consider using something like this is that, among other reasons, is that distributions from it are not counted as income on the FAFSA. Which kind of gets at this idea that it's a bit of a protected account. So it's also generally exempt from your estate, which means it's protected from bankruptcy and creditors. They generally cannot go after funds in a 529. So I've seen people talk about how from an estate planning perspective, if you know you're gonna need it for education expenses later in life, it's kind of like, huh, it's not a bad place to sock away some money.

Henah: Can I ask a clarifying question? 

Katie: Sure. 

Henah: So if it's not counted as income for your FAFSA...FAFSA...however you wanna pronounce it, so that technically would reduce what's seen as your income when you're applying for scholarships, right? 

Katie: It's your distributions from it that are not counted as income. I don't know that it's reducing your taxable income from the standpoint of it's gonna make, the contributions that you're making to it are lowering your taxable income. My understanding of it is that if you're taking distributions from it, that does not count as taxable income. So you could be, you as the beneficiary could be withdrawing $20,000 from it, but I don't think they're looking at that when they're determining what you qualify for for financial aid.

Henah: That was my question, which is, how does that play a role in if you're eligible for certain stuff like that? Okay, that makes sense. 

Katie: Totally. So I guess to me the TL;DR is that if you live in a high state tax location that offers the state tax exemption, and your kids are going to maybe attend a private school K through 12, or you have several children so you're pretty confident you're gonna end up paying for some college and your own goals are on track, it probably makes sense to contribute to one and you know, use the funds for their education in real time if you want to. I think the obvious downside is just that it limits your options, but if all of those other things are true, you may be willing to forgo some flexibility in exchange for lowered state taxes if you have a plan for the money.

Henah: That makes sense. So outside of education, though, there are obviously other expenses that are gonna pop up for your kids. So what are your other options that are out there? 

Katie: So when I see this stuff talked about online, there are two accounts that I always see pop up. There's the UGMA and the UTMA: the Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act. And in my dumb brain I always read it as UGMA and UTMA. 

Henah: I've never heard of it, which means that I'm not rich enough to know, so you're a step ahead of me. 

Katie: Well, these are like custodial accounts that, they allow you to transfer assets to a minor, but in my mind, there's some pretty obvious downsides, from the standpoint that they're in your child's name, which means they now control the funds. You're not getting any tax benefits, and it counts as the kid’s asset, which means it could affect FAFSA if you end up going that route. So I think the upside is like, oh, it's more flexible. They're typically more flexible, I'll say, than a 529. But ultimately I am not aware of many use cases that would make these types of accounts worthwhile. 

Henah: Right, 'cause isn't it basically just a cash fund, then? 

Katie: You know, I'm not sure, necessarily, what your limitations are or the flexibility within…I'm pretty confident you can invest it. I think for me it's just the relinquishing of control unnecessarily, that you're putting it in the kid’s name and so you now have very little control over, I guess, what it's used for. Or, you know, you might have the best of intentions when they're five, but maybe by the time they're 18 or 25 and they're getting access to the money, you're not so sure you wanna give them that amount. I don't know, I just, to me I think there are two paths that strike a really nice balance between flexibility but also tax benefits, and both really stand to benefit the kid a lot. 

So number one is a good old-fashioned taxable brokerage account that is in your name, that you own, but that you earmark for the kid. So it has full flexibility if you end up needing it for something else; you can use it for that, but you are intentionally setting aside the money, and if all goes according to plan, it's something that you could gift to them. And I know that there are certain rules around gift tax exclusions and estate planning things of that nature. But that's one that I think kind of makes sense, especially if you think you're gonna be the one making the purchases, as opposed to giving them a lump sum. 

There are a lot of ways to save for the future. You could be talking about “Hey, if they wanna do competitive cheerleading or they wanna do, you know, travel baseball, I wanna have the money set aside to pay for it.” That's one such way. 

The other thing that I think is kind of interesting is a Roth IRA that they contribute to with their own earnings. So your kid can open a Roth IRA and start contributing to it, but if you own a business you can employ them and you can pay them a salary. So you could employ your own kid to do some work in your business, and you could get really crafty and you know, pay them a salary of $13,850, which is the standard deduction for singles. You get to deduct the money you're paying them, so it's a write-off for you, and they can invest all of it tax-free in a Roth IRA if they wanted to over time. Obviously the limit is, what, $6,500 a year this year? So it's not like they could do it all at once. But that's another kind of interesting approach that I like, that also marries the idea of you giving them money to them working for it and understanding the value of a dollar. 

And a note of clarification on the Roth IRA is, if you're a minor, you have to have a custodian on the account. Like a parent has to be a custodian on the account, and obviously you need earned income in the eyes of the IRS to contribute to one. So those are kind of two little footnotes that I would add. 

Henah: I think that's a great point and a good caveat for us to keep in mind. 

Katie: Anyway, that's my two cents. 

Henah: I believe it's way more than two cents now, actually. No, that was really helpful 'cause I think it's something that people don't often think about until the child is older, and so this is a really great way to kind of proactively start considering your options. 

Katie: Amazing. Well, that was super fun. 

Henah: Ameezing.

Katie: That was money advice for parents from two people without children. 

Henah: Good luck. Just kidding. 

Katie: Thanks for listening to this week's Rich Girl Roundup. Bye.