Gift Giving Guide: The Roth IRA for Kids

Be one of a kind with Mike's Plan.

Welcome to the One of a Kind Financial Show Daily with your host, Mike Milligan. It's Christmas morning. I don't expect us to have a large viewership today, but maybe in the future it'll come out. Recently, I recorded the gift-giving guide that goes beyond games, board games, dolls, more gifts that are just going to go in a store. I shared ways on how you can fund the future. And I am gonna share that today to the general audience. We shared that to the clients of One Oak Financial. I'm gonna share that to you. And if you text the word NEWS, N-E-W-S, to 600-700, I will make sure you get the gift-giving guide I reference in this. So Merry Christmas. May it be a festive and joyous day, but most of all, realize you're one of a kind. I'll see you soon. Hi everyone, this is Mike Milligan with One Oak. financial. Um, as we're in the midst of this holiday season, many of us are thinking about family traditions and the joy of giving. Um, in this next few minutes, I want to walk through some strategies for making gifts that last, uh, a lifetime versus those that are just appreciated for a very short period of time. And at the end of this, I want to give like some bonus information about how we can together impact our community. Let me start with a story though. I remember, uh, when I was young, uh, I was, I think I was 8 years old, sitting in our family ranch-style home in North Carolina. And, um, we got an Atari for Christmas. Do you remember Ataris? Those little, uh, joystick, uh, game cubes with cartridges that had games like Frogger, Donkey Kong, um, my favorite, Pac-Man. Uh, man, would I love to have that system back, but not because of the graphics or the difficulty of the games, but more for just nostalgia. The memories of sitting there on Christmas morning with my family playing a game together in that little small home in North Carolina. That was a big investment for my parents at the time. To be honest with you, my, uh, my father at the time was working in a grocery store. My mother was working at a pharmacy as a clerk. And, uh, to be able to afford that at that point in time was a huge investment into the happiness of their children. But in the grand scheme of things, if that Atari cost $50 back in 1984, that $50 today compounded with interesting growth from the S&P 500 would be, uh, significantly more money than it is today. So that's what I want to talk about. Instead of giving items that just are appreciated for that short period of time, the season is a chance to explore gifts that may support a child's financial future. I want to walk you through several educational strategies, including the 529 college savings plans, Roth IRAs for teens, UTMA accounts, Insurance-based tools, and much more, including I want to introduce a concept to you that you may have never heard before. By the end, I want you to have a clear understanding of how these tools work and how families commonly use them. We also created for you as our gift to you a, um, holiday gifting to kids and grandkids guide. It's an 11-page Um, it's an 11-page, uh, tool that you can use that helps explain these more in detail. Let me get on with our topics though. Many families want to give gifts that have a lasting memory. With rising education costs, housing prices, and general financial complexity, we all wonder how will our kids afford The future. Financial tools available through the IRS and various custodial programs can help families support future goals in tax-advantaged or tax-efficient ways depending on their situation. Starting early provides more time for saving and investing to potentially grow. And although outcomes depend on several factors like what you choose to invest in, uh, your ability to leave the money uninterrupted, market conditions, and even individual circumstances, Albert Einstein's principle of the 8th wonder of the world being compound interest and time makes a lot of sense to give money to kids early in life. So let's walk some of the most commonly used options. A 529 plan is a tax-advantaged education savings account. Contributions grow tax-deferred and withdrawals are tax-free when they're used for qualified education expenses. Subject to the IRS rules. That money can be used for college tuition, trade schools, graduate schools, apprenticeship. Even now, it can be used for K through 12 tuition up to some IRS limits that were imposed and brought to us. That new K through 12 use of the 529s was brought to us by the SECURE Act. There's a, uh, there's also a benefit that was brought to us in the last couple years where 529s can be used to pay, repay student loan interest up to $10,000. So why do families use them? They use them to, for funds to grow tax-deferred, for withdrawals to be tax-free if used in the right way. And the key to it is anyone can use it once a 529 Is open at birthdays. You can have multiple folks send $25, $50, $100 gifts into that 529 plan. It is so— it's such a great tool to be able to use. According to the IRS, the annual gift tax exclusion is projected to be $19,000 per individual, or it is $19,000 per individual in 2025, meaning you can contribute up to that amount to a beneficiary. To avoid gift tax returns. Uh, the one cool thing about the 529 is there's an exemption in the IRS code that allows you to make a 5-year election of that annual gift and put it in a 529 plan. So if you're sitting there as a grandmother or grandfather and you're thinking, man, I've, I've got a problem when it comes to the assets that I have, you can lump sum that annual gift exclusion times 5 into a 529 plan for your kids. And the great thing about that is if you own that 529 plan, then the withdrawals are not subject to FAFSA reporting, or the asset is not subject to FAFSA reporting for your grandchild. It's an, it's a little-known benefit of having there. All right, let's move on from 529 plans and go to UTMA and UGMA accounts. They're very flexible tools for gifting and investing on behalf of a child. An UTMA, the Uniform Transfers to Minors Act, or UGMA, Uniform Gift to Minors Account, or custodial investment accounts set up for a minor. Your state actually defines the age of a minor. Most of us just assume that's 18 years old, but depending on the state, it can go all the way up to 21. In some states, even go a little bit higher than that. And so the money, it can be managed and stay invested until the child reaches that adulthood or comes out of Uh, minor's status. An UGMA account holds traditional financial assets like stocks, bonds, and mutual funds. And UTMA allows all of those plus additional property like real estate, even collectibles. So it offers broader flexibility. And here's the key, the money placed in these accounts becomes the child's money. Uh, you're just managing it until they come of age. So not only is the money you fund the account with the child's, also the growth. Which means the growth stays off of your personal tax return and off your balance sheet. The families consider these because they're flexible. They can be used for a broad range of expenses and they could benefit the child. And there's the potential for investment growth. It's also a very straightforward structure. Now, these were very popular in, um, uh, 20, 25 years ago, not so much popular as of today because of the advent Holiday term, the advent of the 529 plan, and what I'm going to kind of push forward and talk about next. Before I go on to that next thing that I talk about, let me just wrap up on UGMA's and UTMA's here. Once the child reaches adulthood, the money is theirs. You have no ownership of it. They have complete control. For some families, that's a positive. For others, It means you have to think through how mature the child will be upon the age of receiving that. One tax note is earnings inside of that account are taxed to the child, often at a lower rate. But once investment income crosses certain thresholds, something called the kiddie tax jumps in. That is something we can help you navigate through when the time comes. For the right family, an UTMA or UGMA Can be one of the simplest and most flexible ways to give a gift that grows right alongside your child. I mentioned a tool that has only really been around, uh, and made somewhat the UGMA and UTMA, um, has taken some of those accounts and now pushed it here. It's a Roth IRA for kids. If a teenager or even a young child has earned income, they're eligible to contribute to a Roth IRA up to the lesser of their earned income or the annual contribution limit. Stay tuned because in just a few minutes, I'm gonna talk to you about a concept called the family payroll and how Roth IRAs for kids can work in that. But a Roth IRA allows for tax-free growth and tax-free withdrawals in retirement, assuming IRS rules are met. Because contributions can be withdrawn at any time, though earnings have very specific rules, some families use Roth IRAs to teach early savings habits. Starting early provides more time for potential growth through market performance, though market performance will very much vary. That, uh, that more time and the potential growth— Albert Einstein's 8th Wonder of the World strategy. Think about this. A 15-year-old starts investing even $500 or $1,000 per year, could see extraordinary long-term time in the market thanks to decades of compounding growth. Uh, they also have tax-free withdrawals in retirement. They teach financial responsibility early, and they're fueled by time, which is the biggest ally. If you want to give something that has the potential to truly change the life of your kids and grandkids, the Roth IRA. is one of the best-kept secrets. The next strategy is IULs, indexed universal life, for long-term legacy. An IUL is an insurance contract that is permanent life insurance that includes a cash value component tied to market index. It includes insurance costs, fees, and policy expenses, but it also allows for early insurability of a child before life So families consider this because of that insurance protection. You know, before being diagnosed with something, before having a life-altering event, having life insurance on a child protects the insurability.

Whoa.

Protects insurability. And there's the potential for cash value accumulation depending on the policy performance. You also have access to policy loans and withdrawals, again, subject to what the contract says. And then there's premium flexibility depending on how it is structured. There's something called minimum cost or minimum, um, the minimum value, and there's also a maximum amount you could put in next year. IULs are complex tools with long-term commitments, and they're not suitable for all families. Performance is based on index crediting methods and caps It is not the same as investing directly in the stock market, no matter what TikTok tells you. It's important to review costs, guarantees, and policy details carefully, ideally with a financial professional who understands the pros and the cons of putting money inside of an indexed universal life policy. Uh, just a couple more sections here before we move on. To my final bonus. And that the next one is, uh, is giving gifts of cash or securities efficiently. Uh, a lot of people just ask me all the time, can Mike, can I just give cash to my family? And the answer is absolutely yes, you can. Uh, but there's a limit to that. It's $19,000 per person in the year 2025 without triggering or triggering a gift tax return and bleeding into unified credit exemption amount. If you're married and you have one kid, you can actually give $38,000, $19,000 from each spouse to the kid. It's simple. Just write a check, set up a recurring transfer, uh, use a gifting platform that keeps records. That's how simple it is. When gifting securities, there are tax implications that vary based on the donor and the recipient tax situation, uh, particularly if those stocks are appreciated. For instance, the basis does not step up on a lifetime gift. The basis only steps up with a death gift. Okay, it's important to consult a tax professional to understand how gifting may affect both you and your child. And then finally, there's some other things that are here like Fidelity Youth or Custodial Accounts. Uh, firms like Fidelity and Charles Schwab have set these up that allows for supervised engagement with budgeting Saving and investing. These tools teach financial responsibility, and boy, we could use more of that, though they should be used with appropriate oversight and understanding of the risk involved with investment markets. And if you own a business, this is the family payroll method. You ready for this? I'm 14 minutes in. My team told me to make this 5 minutes, by the way. They just know that's not going to happen, but I'm 14 minutes in. And if you've never heard of this concept before, I actually got this concept while teaching principles— I'm sorry, the capstone course at Old Dominion— when a student of the course who does not have long-term experience in financial planning just came up with this, and I thought it was genius. Now, we've been using this, but I've never called it the family payroll before. But if you own a business, if you're an entrepreneur with any 1099 income, you can pay your children for legitimate work. performed for the business in some cases. When structured properly and documented correctly, this income may qualify as earned income and up to the standard deduction would be tax-free to the child and tax deductible to your business. And that could be used for the child for savings investments, including that Roth for minors concept that I talked about earlier. Wages must be reasonable. for the work performed. They must be properly documented and compliant with IRS guidelines. Families should work with somebody who understands this concept, like a tax professional or a tax planner, to ensure proper classification and documentation. And then finally, here's a quick overview. Annual gift tax exclusion. According to the IRS, you can give up to the annual exclusion amount, projected to be $19,000 this year, without filing a gift tax return. Gifts above this exclusion would require you to file a tax return, a gift tax return, And then chip away at your lifetime giving amounts. Um, for record keeping, families need to track the amount, the date, the recipient, the purpose, the account type, and have some statements or documentations to prove it. Good documentations help support an IRS audit and keeps you in compliance. And then finally, there's gifting that can fit into your estate plan. Lifetime gifting can play a role in the overall estate strategy. Families can choose to give during their lifetime to support education, Career development or personal milestones. They can reduce the size of their taxable estate depending on the current laws and share experience, financial values with their loved ones. Estate planning needs vary widely and gifting strategies should be coordinated with an estate planning professional or our legacy specialist to ensure alignment with your goals. Guys, what strategy is right for you? I don't know this, but like I told the story of the Atari at the beginning, Uh, except for nostalgia and the family values, that has zero value to me now. Uh, $50 that would have been contributed, uh, to an account over 41 years ago would have a lot of value. So each tool we've discussed serves a different purpose. When evaluating these options, consider what aligns best for your family goals. If it's education, 529 is a good option. Flexibility, uh, for expenses that may come up, maybe it's UGMA or NUTMA. Early financial learning, use a custodial account. If it's insurance protection with cash value to guarantee insurability in the future, an IUL. If you're a high-income earner, right, and you want to pass money down, use the family payroll structure and create a Roth IRA. But if your child also has a part-time job, teach them early how to set up a Roth IRA for minors. There can be simple transfers, and then business owners can support your child's work by putting them on the payroll, getting the tax deduction, and getting some potential tax-free income to them. This season, many families look for ways to give meaningful, and financial tools can offer ways to support education, savings habits, or long-term planning depending on what works best for your situation. As a thank you for joining me, we've put together a complimentary resource, the Give More Than a Gift: Set Up Their Future tool that I mentioned to you earlier. It summarizes the topics that I covered here to help you begin exploring your options. This guide is educational, complimentary, and not dependent on becoming— and it doesn't mean you have to become a client of One Oak Financial to get it. If you'd like to learn more and determine what may be appropriate for your family, we're here as a resource. And then that final bonus. In our community today, there are many who are struggling and suffering. The best gift I think you can give to the next generation is to show them how to give out of abundance. Many people today are sitting with— there's a record number of Americans With over $1 million in their 401 or IRA balances. And for those of, those of you grandparents or those who are older who are over 70 and a half, you have the ability to do a qualified charitable distribution. And if you're over 73, you have to take a required minimum distribution. Consider giving part of that required distribution if you don't need it to live on, to a charity. But when you do so, bring those, bring those kids and grandkids into that decision. Show them what your legacy is. Your legacy is about moving things forward, giving out of abundance, and hopefully setting up the next generation for a successful future. Happy holidays from One Oak Financial.

Investment advisory and financial planning services offered through Advisory Alpha, LLC, a registered investment advisor. Insurance, consulting, and education services offered through Ideas by Mike LLC DBA One Oak Financial. Ideas by Mike LLC DBA One Oak Financial is a separate and unaffiliated entity from Advisory Alpha LLC. Certified Financial Planner Board of Standards Center for Financial Planning Inc. owns and licenses the certification marks CFP Certified Financial Planner and CFP in the United States to Certified Financial Planner Board of Standards Inc., which authorizes individuals who successfully complete the organization's initial. And ongoing certification requirements to use the certification marks. While tax and legal issues may be discussed in the general course of financial and investment planning, Advisory Alpha does not provide tax or legal services. Please consult with your tax or legal professional prior to making decisions relative to these issues. All opinions expressed by externally cited sources are solely their own opinions and do not reflect the opinions of Advisory Alpha. This is for informational purposes only and should not be relied upon for investment decisions. An annuity is a long-term financial product designed largely for asset accumulation and retirement needs. All guarantees are backed by the claims-paying ability of the issuing insurance company. A 529 program is a tax-advantaged savings plan designed to help pay for education. 529 programs are intended to be used only to save for qualified education expenses. These programs are not intended to be used, nor should they be used, for the purpose of evading federal or state taxes or tax penalties. You should seek tax advice from an independent tax advisor based on your particular circumstances. Most 529 plans are invested in exchange-traded funds or open-end mutual funds. However, other investment types are possible. Such as stable value funds, certificates of deposit, and separate accounts. Before investing, you should consider whether you or your designated beneficiary's home state offers any state tax benefits or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such states' 529 qualified tuition program.

Be one of a kind with Mike's Plan. Innovate, shock growth, take a stand. Visibility, strategy, take that lead. Transformation's yours, fulfill the need. Mike's got the way to help you rise and stay. Leadership impact you'll find in your one-of-a-kind mind. Be one of a kind, take the flight. Mike's the guide, you'll shine bright.