December 14, 2012 at 2:00 pm #17629
We received this from a fellow member and wanted to share it with you:
“I thought I would share what I did/do for my son, his money skills and college funding.
First, I have a small CPA (primarily tax focus) and financial planning firm (started in 1995 after a dozen years with 2 of the now “Big Four”). When my son was 8, I purchased an office building and he became the janitor, paper shredder and landscape keeper and subsequently helped with office stuff. He was hired and paid by the LLC that owns the office that my CPA firm rents space from. He did these duties well and fairly inexpensively. What he did not know until after he turned 18, graduated from High School and chose a college is that I paid him market rates – putting the money into a ROTH IRA. He opened a checking account around 6th grade for what little I could get by paying him (with the max going to a ROTH)
By paying him through the LLC, no payroll taxes were incurred (up to age 18 working for parents in an unincorporated entity) and he never had earned income that was not completely eliminated from income tax (and I deducted the business expense) – therefore a ROTH (vs. traditional) IRA made perfect sense. It is his college fund, if needed, as withdrawals for higher education can be made penalty free. And, if those funds are not needed for college, he has a pretty good start for retirement funding. I also use a 529 plan – put money in the state plan stable value fund, deduct the contribution for state income tax purposes, pay all college costs, reimburse all college costs from 529, rinse, repeat. Our state tax rate is 7% so the state gives me 7% off my sons college costs – ridiculous. Not big savings, but little things add up.
My son is now a junior in college – Bio Chemistry major and possible minor in Russian. Fortunately, he stayed in state for college, so tuition is less, and his scholarships make the cost easily affordable for me without him needing to use the ROTH IRA. I told him about the ROTH on his 18th birthday (legally it is his) and we discussed the purpose (college and/or retirement) and he has made enough to add to it every year since turning 18. I conservatively managed the IRA (we both do now), which is now close to $40k. That money may have been needed absent scholarships or if he chose to go to a more expensive school. He did not get in his top choice – Chicago – but had other more expensive options. He is in the Honors College at USC (that’s South Carolina). The ROTH IRA may still be needed for a masters degree or med school if he goes that way and does not get scholarships at that level. He will not finish college with debt.
We give him a monthly “allowance” for housing, food…which he does the budget for at the beginning of the year. He is good with money, from my point of view (likes to earn & save vs. spend). He is also an avid reader and gets many books from my wife and I. Most of the books from me deal with money – including all from Bill and Addison. He is also very good with history. Although some may disagree with this, I told him his most important job while in school is top grades, and since starting college, each semester I give him $25 for the first A, double it for the next ($50), double for the next ($100)……I did this in high school also (starting with $10). He learned the power of compounding fast and that grades matter at this point.”December 17, 2012 at 3:01 pm #27298
What about starting an LLC with an (adult) child as a partner, say a family farm, and letting that offspring earn shares in the LLC either in lieu of or in addition to salary for performing services to the LLC. If it was a farm could that be used to minimize estate tax on my death, by increasing the offspring’s ownership in the LLC as I (and the LLC) get older and theoretically more valuable?December 17, 2012 at 5:22 pm #18012
I have another example of helping our daughter learn money skills during college. We purchased a ‘prepaid tuition’ plan when she was in preschool and put away additional funds for college expenses.
When she was choosing where to enroll, one of the things she considered was the additional cost of a private school education. When she saw the total 4 year cost of attending a private versus state school (not including the prepaid tuition), she decided the private schools could not possibly be worth the additional cost so she chose the in-state university. When she was getting ready to move off campus her second year, we purchased a townhouse for her – using some of those ‘excess’ funds. We titled the property 95% in her name and 5% in my and my husband’s name.
The mortgage was in our name as the rates were better. She leased out the additional bedrooms, with the rent nearly covering the mortgage. She graduated a couple of years ago and continued to lease the property. Recently we were able to ‘gift’ her the remaining 5%, she obtained a mortgage in her name. She has since moved out and the lease on the property covers all expenses plus pays over 1/2 or her rent. Meanwhile she has learned about managing rental property, tax advantages of investment income and a lot of other life skills while getting an undergraduate degree at a top state university.
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