Smart Ways to Help Your Adult Children's Financial Lives
Start by familiarizing them with financial concepts, digging them out of debt and seeding their savings
Joanne Burke is a Certified Financial Planner in Vienna, Virginia, and a mom with two 20-something adult children. She is helping them by planning and investing for their futures.
"The way I help my kids is to fund their Roth IRAs," says Burke, founder of Birch Street Financial Advisors. "The Roth accounts are incredibly flexible and have the capacity to grow into a sizable account over the course of their lifetime. This is the legacy that I'm leaving for them."
"Instead of them inheriting my wealth when they're in their 50s or 60s and in the highest earning potential and tax brackets, I'm giving it to them now. The compounding feature in a tax-free account is unparalleled," she says.
Roths are funded with income that already has been taxed; capital gains, dividends and interest on investments can be withdrawn tax-free.
Helping With Housing, Too
Burke says she also will help her children when it comes time for them to buy homes. "I plan to help them with a down payment on a home so they can avoid mortgage insurance premiums while being able to build equity in the home value," she explains.
Seeding retirement savings funds and offering to chip in on the down payment for a home certainly are generous ways for parents to help adult children start building wealth. Here are some additional ways you can help an adult child get a leg up financially.
1. Use intra-family loans. Why have an adult child borrow from a bank when he or she could get a loan from you or another family member?
"Instead of borrowing from a traditional lender like a bank, one family member lends money to another family member," says Nick Marino, a Certified Financial Planner and chief executive at Breakaway Wealth Planning in Columbus, Ohio. "This type of loan can be formalized with a legal agreement outlining the terms and conditions, including the repayment schedule, interest rate (if any), and any collateral required."
"If an adult family member has little or no credit history, adding them as an authorized user on your credit card could help give them a boost."
An adult child could benefit from an intra-family loan in a variety of ways.
"Intra-family loans are often used for various purposes such as helping a family member purchase a home, start a business or cover unexpected expenses," Marino says. "They can offer more flexibility and potentially lower interest rates compared to traditional loans, but they also require clear communication and trust between family members to avoid conflicts."
2. Add an adult child as an authorized user. Placing an adult child on your credit card as an authorized user is an easy way for an adult child to build credit.
"If an adult family member has little or no credit history, adding them as an authorized user on your credit card could help give them a boost assuming you exhibit good credit habits," Marino says.
But he wouldn't advise giving them purchasing power on the credit card. Getting a credit boost from adding them as an authorized user is enough.
Financial Education Is Vital
3. Giving annually to an adult child. Each year, you can give a generous amount to an adult child without paying a gift tax.
Donors, including each spouse, can give as much as $18,000 to an individual without the recipient having to pay tax. "This is a powerful tool I use often with my clients for tax and estate planning purposes," Marino says.
4. Pay for financial planning sessions. Get your adult child started on a solid financial path by giving them sessions with a Certified Financial Planner. Some planners, such as Sanctuary Financial Planning in Charlotte, North Carolina, have packages geared toward 20-something adults.
"Our daughter just got married and part of our gift was a financial plan."
"As an example, my husband and I started an advice-only planning firm where we charge for our time, and we've put together a basic package that parents can gift their 20-something kids," says Sarah K. Charles, founder and managing principal at Sanctuary Financial Planning in Charlotte, North Carolina. "It's the perfect college graduation present! Or they can gift financial planning as a wedding gift. Or estate planning when the grandbabies come."
Charles adds that she gives the gift of financial planning in her own family as well. "Our daughter just got married and part of our gift was a financial plan. She and her husband are also expecting — and we've discussed giving them the gift of estate planning because we know it's important," Charles says.
5. Pay for professional conferences, groups and classes. Helping an adult child learn new skills and climb the career ladder may help them financially as well.
"One client sent their daughter to a new AI conference," says Red Holzbach, a certified financial planner at Red Kennedy Financial in Boston. "Another sent his younger relative to a multi-day investing seminar." To help in this way, a parent could consider paying the conference fee or covering the cost of a hotel and flight.
Holzbach also recommends speaking or networking classes and a year's membership to a professional group.
6. Give shares of stock. Parents can encourage adult children to invest by giving them a few shares of stock in companies they know or use.
"Teach your children about budgeting, saving, investing and managing debt."
"If you have a child with any low-income years, such as while they are in grad school or between jobs, you could gift them shares of appreciated stock to take advantage of any room they might have in the 0% long-term capital gain bracket," says Linda Gillespie, founder of Real World Financial Planning in Chestnut Hill, Massachusetts.
Tax-Free Gifts Are Helpful
"You can gift highly appreciated shares from your own portfolio without paying any capital gains tax yourself and then, if the gift recipient has space in their 0% cap gains bracket, they can then turn around and sell some or all of the shares without a capital gains tax bill, assuming the shares were held by the gift giver for at least one year," Gillespie says.
7. Encourage financial literacy. Learning the basics of personal finance will help adult children make smart financial choices.
"Teach your children about budgeting, saving, investing and managing debt," says Dan Pinheiro, a Certified Financial Planner and founder of South Coast Planning & Wealth Management in Fall River, Massachusetts. "Offer financial literacy guidance to help them make informed decisions."
8. Help with debt. Relieving some of the pressures of debt may be a great relief for an adult child.
"If feasible, help them pay off high-interest debt like student loans or credit card debt," Pinheiro says. "Consider offering an interest-free loan to assist them with repayment."
