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Kids and Money

Andrea Coombes, of Market Watch, has a nice article about Young Savers. The advice given sounds awefully similar to that given to adults by Suze Orman: start an emergency fund, consider a Roth IRA, and then consider seeding some money in direct investments in securities. Also, consider saving for college, but remember that savings beyond Roth IRAs weigh against financial aid.

I have a different spin on this, and maybe it will give you some personal incentive to either start a business, or help you to save on your taxes if you already have a business. Do not let someone else employ your child... hire him/her yourself! There are great benefits to doing this. First of all, if you hire your child to work in your family business, you pay no FICA or FUTA, which automatically reduces the costs of employing them. In addition, the child does not pay taxes on these funds, and they reduce your profits, and therefore your own tax burden.

And I would echo most of the statements in the article. Have your child help you and learn the ropes of finances. Teach them about saving and investing. This is one of the most lacking skills that children receive. Definately start a Roth IRA. Consider this, Roth IRAs are funded with after-tax dollars, and earnings are tax-free. If your child funds these now, they will never pay taxes on these funds, ever! In addition, consider a Coverdell ESA for college savings. Combining these two imposes a limit of $6,000 a year. The rest could be used for things like clothes, entertainment, and other expenses for things your child would like to do. Remember positive reinforcement. Show your child that they should do the right thing first, save and invest, and then reward themselves with what is left. So often, we see depravity in personal finance discussions... for longevity, rewards are in order.

And if you are truly worried about financial aid, consider that Roth IRAs are not considered in financial aid calculations, and that withdrawals can be made from IRAs for educational expenses. So, start the Roth before the Coverdell. And, contributions can be withdrawn from Roth IRAs after five years, without penalty! But, if you are setting your child up for this kind of success, chances are your financial house is in order, and financial aid will be limited anyhow.

Also, if you are familiar with the concept of Self-Directed IRAs, remember that Coverdell ESAs used to be called Education IRAs, and for good reasons, they were treated in the same manner, and you can Self-Direct a Coverdell ESA. I am planning on setting each of my children up with a Coverdell ESA, and I will be directing it, just as will my wife's and my own IRA. They can wholly own an LLC, which has no entity-level taxation, like a corporation. Then you can invest in things like real estate and other businesses. My goal is $100,000 for each of my children's Coverdell ESAs, by the time they need them. Also, I would like $1,000,000 in each IRA for myself and my wife, by the time we can withdrawal... in 34 years. This is highly doable. Also, consider the Self-Directed route, and then when your child is of age, he/she can manage the ESA and run a business, letting him/her develop more skills while in college.

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