- Dec. 03
- Richard Parker
How to Build a Nest Egg for Your Children
If you were launched into the world at the age of 18 or 21 without a nest egg, then you know the difficulties that can arise. You might also have paid close attention to those who seemed to have an easier climb to the top. After all, you’re much more likely to try and live your dreams when you have a financial safety net.
If you happen to be one of the lucky people who did have a financial nest egg gifted from parents or grandparents, then you know how important it can be.
There is no doubt about it though; if you have the cash, it is easier to make a big start in life. What is important is that as soon as you can begin building the best egg, you do. The earlier you start, the more your child or grandchild will benefit.
So if you want to build a nest egg, here are some tips.
A savings account is where you should turn after maxing out all of the JISA options you have. Savings accounts don’t have the same tax wrapper that you will find on the Junior ISA accounts – which can see them not have the same value.
If you regularly max out the annual contribution to the JISA, then your next step is to pile a good excess into the savings account.
Something to keep in mind is that a savings account doesn’t have access restrictions to be accessed at any time. One of the bonuses to having a savings account is that you can help your child learn to manage money as they grow.
A Junior ISA is one of the first things you should consider when building a nest egg for your children if you live in the UK. You can put away a set amount each year, and the rates are higher than regular savings accounts.
It is essential to remember that the return isn’t guaranteed because the money is invested in the markets. You can keep track of those markets, though, and if you need to, you can switch between providers.
We know that buying property is one of the best ways for parents and grandparents to hand down wealth in most countries. It is also possible to transfer the property into the child’s name ahead of death. In some states in America, you can benefit from prop 58 loans – which means you can transfer property to your children without triggering a property tax reassessment.
If you decide to invest in property to build a nest egg for your children, it is crucial that you seek advice about the possible inheritance taxes and others that will be involved.
A Kid Roth or a parent-funded Roth, means that as a parent, you pay into a contributory IRA or Roth 401(k) or 403(b).
If you choose this method, grandparents and parents can pay into a Roth and build a tax-free (and sizable) nest egg. There are some limits, and it is important that there is earned income too.
The easiest Kid Roth is to make a Contributory Roth donation of up to $6,000 for the child or grandchild. Assume the child has a job that also pays over $6,000.
Grandparents could put money into a Roth IRA for their grandchildren and invest it. If they do this for ten years and the IRA earns 6%, the Roth will be valued at roughly $79,000 when the child turns 25. If they stop financing after ten years, but the child keeps the Roth invested at 6%, the Roth will be worth around $813,000 when they retire at 65.
If the child invests the same amount as the grandparents between 25 and 65 at the same rate, the total will be around $1.65 million.
A Designated Roth Account is a Roth 401(k) or 403(b) option that most employers currently provide (DRAC). A grandparent may give the amount of the DRAC payment to their child or grandchild as a gift. In addition, the child/grandchild would be able to take full advantage of any matching contribution payments (which would be considered tax-deferred).
Assisting the youngster with a DRAC can make them aware of the value of saving for retirement. Whenever the child or grandchild is in a lower tax band, DRAC, like the contributing IRA, provides a significant benefit.
Gold is always a good idea when it comes to passing down wealth with ease. It can be done even for those on a budget. Buying small items of gold over the years can stack up to a larger amount. This can then be weighed and sold as needed.
It’s not as effective as passing on property or cash in especially designed accounts, but it does offer some amount of financial support.
If you are looking at ways to invest your cash that aren’t complicated and offer a reasonable return, read: Wise Ways to Invest Your Cash.