Providing Financial Support To Your Children Requires Strategy
You would be within your rights to decide that, now that your children are grown up, your income and your retirement savings are for you and no one else. Your goal is to be able to support yourself in retirement without depending on any family members except your spouse, and if there is anything left when you die, your children can inherit it. If your goal is to build generational wealth, then it makes sense to help your children financially while you are alive, too. If you wait for them to inherit from your estate, the inheritance will barely make a dent in paying down their debts. So many of your children’s main expenses, such as housing and education, cost a lot more than similar expenses used to cost when you were their age. Meanwhile, it helps no one if your kids use you as an ATM or a source of financial bailouts. Everyone will be in a better position financially if you base your financial support to your children on long-term strategy. A Washington DC estate planning lawyer can help you strategize about how to help your children financially without jeopardizing your retirement savings.
Don’t Be an Emergency Fund for Your Children
From the perspective of building generational wealth, the worst thing you can do is to take money out of your retirement savings and use it as a bailout for your young adult son or daughter. Withdrawing money from your retirement savings before you retire is very costly. Besides the early withdrawal penalties, the money you withdraw from the retirement account counts as taxable income for the year in which you withdraw it, whereas if you had left it in the savings account, it would be tax-free. Besides, there is no guarantee that this emergency bailout will prevent the need for future bailouts.
It makes more sense to decide that, from the time your children reach adulthood, you will give them a fixed amount of money per year. It can be $5,000 or $10,000 or whatever amount you can afford, as long as it is below the annual gift tax exclusion, which is $17,000. This money can help your children avoid the need to take on debt. They can use it to pay college tuition, reducing the amount they must borrow for college, or they can use it to pay down credit card bills, reducing the amount of interest that accrues. If they are in a financial position to do so, they can even keep the money in savings and then put it toward a down payment on a house. The goal is that, by the time you retire, your children will no longer need money from you. If you continue to give it, or if they later receive it as an inheritance, it will truly become generational wealth.
Contact Us Today
A Washington, D.C. estate planning attorney can help you determine the best times and the best amounts for cash gifts to your adult children. Contact Tobin, O’Connor & Ewing in Washington, D.C. or call 202-362-5900.