By R. Todd Holden | Wealth Advisor

For many clients, their philosophy on providing gifts to family members evolves over the course of their retirement. Early retirees tend to have the philosophy of “This money is for us, and the kids get what they get when we’re gone.”  This seems to change between years 5 and 10 of retirement. I often hear, “There is no way we are going to spend all of this money, so we might as well see the family enjoy some of it when we’re still here.”

This raises the question of what constitutes a healthy gift, a gift that helps the next generation(s)? In a general sense, gifts that produce great memories or support productive financial outcomes for the next generations make sense. Gifts that come with ongoing bills or support a lifestyle the younger generation cannot afford do not make sense.

Here are two examples of healthy gifting that I’ve seen clients do well.

Family Vacations — Quite often, grandparents want to take vacations their children cannot afford. Paying for the occasional family beach vacation or cruise so the family can reconnect and the cousins can make memories together is something that can bring clients joy — and seems to be worth the cost.

Roth IRAs for Grandchildren — While most grandparents don’t want to make anyone rich,  they do want to help their grandchildren build good financial habits. We know that the younger a person is when building a savings habit, the better their outcome down the road. When grandchildren have their first jobs, they most likely are not earning a lot of money and still qualify for Roth IRA contributions. Imagine the impact 40-plus years of tax-free growth inside a Roth IRA could have, plus the additional benefit of having a grandchild become an earlier saver. Habits matter, and this will help a grandchild build good financial habits.

This is an area where I’ve learned from clients, albeit a little later than I would like. Although I’m not retired, I started to fund my kids’ Roth IRA earlier this year. Here’s why:

1. I can without any hardship to me or risk to my long-term financial health.
    
2. I see so many people who have money locked into traditional retirement accounts (TSP, 401(k), IRA) and feel stuck because they cannot get to their money without tax consequences. I want my kids to have access to money in retirement that comes with no tax burden.
    
3. If I am wheeled into a nursing home and stay there for 10 years, I may go through all my money, and the kids will get nothing. I’d rather have given some money to the kids when I was healthy even if it means that I enter the nursing home with less.

What’s right for me may not be right for you. If you decide to implement some type of gifting plan, think through the outcome you want and do what is right for you and your family. Of course, the first criteria is to make certain it is affordable and that you do not jeopardize your own personal or financial well-being.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in ordinary income tax as well as a 10% IRS penalty tax.

The information contained in this article is for educational purposes only and not intended as specific, individualized advice. For advice specific to your personal situation, we recommend you consult a qualified financial or tax advisor.