Starting your kids on the right financial path. Resources and tools that may help
August 07, 2014
To help kids develop healthy financial habits, you need to start teaching them about money early. Here's a list of resources and tools that can help you teach them how to get started investing as well as tips for helping your adult kids start managing your accounts.
- Opening an IRA. As soon as your child has earned income from a job, he or she can contribute to an IRA. However, since a minor can't open an IRA, you'll have to do so on his or her behalf. This type of IRA is called a "custodial" account. For 2014, the maximum your child can contribute to an IRA is the lesser of $5,500 or the amount of his or her taxable earnings for the year. (Note that Vanguard mutual funds have a minimum investment requirement, so your child will need to earn at least $1,000 in order to open a Vanguard IRA®.) Opening a custodial IRA for a minor will require this IRA Kit form.
- Giving the gift of stock. You can use this form to make a gift of securities from a Vanguard Brokerage nonretirement account to your child.
- Updating bank information. Linking a bank account to your child's Vanguard account is the easiest and fastest way to move money.
- Creating agent authorization. This form, which provides some of the capabilities of a power of attorney, allows you to authorize your adult son or daughter to perform transactions on your Vanguard account (if the child is under 18, he or she can't make transactions). You can select from two agent authorization options. A limited agent can move money between accounts (including a listed bank account in your name), check account balances, and view account history. A full agent has all the limited agent's abilities and can also change your address, change beneficiaries, and write checks on your money market account. (You'll need a notary's signature to create an agent authorization.)
- Changing ownership. If you need to transfer your account into your adult child's name, add another individual to your account, or remove yourself from a joint account, you'll need to complete the appropriate form. Please note that you can't add a child as a joint owner if he or she is a minor; however, you can add the child as a beneficiary.
Note: To open a savings or investment account for a minor, you'll need his or her Social Security number.
- If you have a family business, you may be able to help your child make IRA contributions by giving them age-appropriate tasks for reasonable pay. Depending on the structure of your business, the relationship may be mutually beneficial, potentially allowing you to lower your business's tax liability while your child earns money that may be used to make an IRA contribution.
- Keep in mind that you need to be smart about the money your child earns compared to the level of work performed. Pay your child the going market rate, but don't create tasks just so he or she can earn money. Federal and state tax rules are complex, so before considering this strategy be sure to consult with a qualified tax professional.
- Once your adult child enters the working world, encourage him or her to maintain an emergency fund of three to six months' salary. If the unexpected happens (job loss, illness, car trouble), he or she won't be forced to put expenses on a credit card.
- A Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) is a taxable custodial account invested on behalf of a minor. A custodial IRA is an account in your minor child's name with you serving as the administrator until he or she reaches the age of majority (18 in most states).
- All investing is subject to risk, including the possible loss of the money you invest.
- We recommend that you consult a tax or financial advisor about your individual situation.