As your children set off on their own, you likely will feel proud to realize you have saved enough for college tuition in a savings plan (knowing their desired college and location may have changed a few times this past year), or your college-aged child may have been awarded scholarships or other financial aid that covers the cost of school. Even with college paid for, some parents may wish to support a child financially in their first years on their own and even the first few years after college as they begin to build their own careers.
And yet, young adults need to develop financial literacy and acumen further so they can properly manage their expenses month to month. Helping your child develop a budget of the income they earn, any financial support you provide, and the expenses they can expect as they set out on their own is a key step in fostering financial independence. If you plan to provide them with monthly support, knowing what costs will look like can provide you and your child with peace of mind. Here are a few areas to consider as your child builds their financial foundation:
- Rent – Rent is the largest monthly expense for many students and young adults. Helping to pay rent can offset a significant portion of a financial burden. Parents may need to co-sign on a lease if their child does not have sufficient income. In some circumstances, it may make sense to explore purchasing a property as a long-term investment and allow your child to use the property during college.
- Health Insurance – Health insurance law allows children to remain on their parents’ health insurance until they are 26 years old. If your child is living in the same state as you, keeping them on your employer plan may be the easiest option and a great way to provide financial support. If they are living in another state, it’s important to be sure that they will have access to providers where they live through your plan coverage. No matter where they reside, it’s worth checking what their school, employer, or state marketplace offers, as there may be more affordable options than what your health insurance plan offers.
- Emergency Fund – If you want your child to begin to develop financial independence but still want to make sure they have funds to fall back on in an emergency, another option to consider is funding a joint checking account with both of you named as account owners. This will allow them quick access to funds in an emergency but will also allow you to monitor what is being withdrawn.
- Family Loans – Instead of making gifts or paying expenses directly, consider providing financial support in the form of a loan. Tax law allows for loans between family members, but it is important to have a written agreement documenting the terms of the loan and to charge a reasonable interest rate to avoid having the loan be considered a gift.
- Retirement Planning – While your child’s retirement is a long way off, helping them plant the financial seeds of retirement early in their career can pay huge dividends down the road. They may have earned income but often do not have surplus income to set aside for retirement, especially outside of an employer-sponsored retirement plan. If they are covering their expenses now but you’d like to help get them set up for the future, you can consider contributing to a Roth IRA on their behalf. You can make contributions up to the annual limit ($6,500 in 2023) or their total earned income, whichever is lower.
All the items above (except health insurance) are potentially considered taxable gifts. If you still claim your child as a dependent on your tax return, typically you can pay for their necessary expenses without worrying about gift taxation. If they are not a dependent, you may need to file a gift tax return if you provide financial support exceeding the annual exclusion amount ($17,000 per person in 2023) in a single year. Consult your tax professional if you are unsure whether you need to file a gift tax return.
To further explore these options and what type of financial support would be appropriate for you and your child while considering your personal long-term goals, please consult with your JNBA Advisory Team.
Please note JNBA is neither an accountant nor an attorney and no portion of the above should be construed as accounting or legal advice. All legal and accounting issues should be addressed with a legal or accounting professional of your choosing. JNBA is not an insurance agent and no portion of the above should be construed as insurance advice. All insurance issues should be addressed with the insurance professional of your choosing. JNBA is neither an agent of IRS nor an agent nor an agent U.S Department of Treasury.
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, LLC.
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