Isn't That Rich Podcast

When it comes to securing your child's financial future, the best time to start planning is now. We had the pleasure of discussing this crucial topic with John Forbes from Forbes Financial, who shared some insightful and practical ways to set your kids up to be millionaires by the time they reach adulthood. While social media may be buzzing with various trends and ideas, it's essential to cut through the noise and understand the real strategies that work.

Have Financial Conversations Early and Often

The most important step in securing your child's financial future is to start having financial conversations with them early on. Teach them the value of money, the importance of saving, and the basics of budgeting. Financial literacy should be a major part of your parenting approach. It's never too early to start instilling these values in your children.

Understanding the 529 College Savings Plan

One of the most popular tools for saving for your child's education is the 529 College Savings Plan. John Forbes explains that a 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. These plans can be used for a variety of educational expenses, including tuition, room and board, books, supplies, and even some vocational and apprenticeship programs.

The biggest benefit of a 529 plan is its tax-free growth, provided the funds are used for qualified education expenses. This means that the money you invest can grow without being subject to federal taxes, making it a powerful tool for long-term savings.

Flexibility and Contributions

One common misconception is that 529 plans are only for college savings. In reality, these plans offer flexibility and can be used for private school tuition and other educational expenses. It's important to start early to maximize the benefits of compound interest and tax-free growth.

In Illinois, for example, contributions to a 529 plan can be deducted from state income tax, up to $10,000 for an individual or $20,000 for a married couple. While the federal gifting limit is $17,000 per year per person, it's essential to consult your tax advisor to understand the specific rules and limits that apply to your situation.

Recent Changes and Additional Benefits

Recent changes in legislation have added even more benefits to the 529 plan. The Secure Act 2.0, which took effect in 2023, allows for unused funds in a 529 plan to be rolled over into a Roth IRA for the beneficiary, up to a maximum of $35,000. This provides an excellent opportunity for tax-free growth beyond educational expenses, but certain conditions must be met, such as maintaining the same beneficiary for at least 15 years.

Other Ways to Save for Your Kids

Beyond the 529 plan, there are other strategies to help your children build wealth. If your child has earned income, you can open a Roth IRA for them. This is a powerful tool for long-term savings, as the money grows tax-free and can be withdrawn tax-free in retirement.

Small business owners have additional options. They can hire their children to work in the family business, providing them with earned income that can be invested in a retirement account. However, it's crucial to follow the rules and ensure that the work is legitimate and appropriately compensated.

Prioritize Your Own Financial Health

While saving for your child's future is important, it's equally crucial to prioritize your own financial health. Make sure you have a solid financial foundation, including an emergency fund and manageable debt levels. Remember, you can borrow for college, but you can't borrow for retirement.

Encourage Smart Financial Decisions

Teaching your children the value of money and smart financial decisions can have a lasting impact. Encourage them to save and possibly match their contributions to show the benefits of saving and compound interest. By making financial literacy a part of their upbringing, you can help them develop healthy financial habits that will serve them well into adulthood.

In conclusion, setting your kids up for financial success involves a combination of early education, strategic savings, and smart financial planning. The 529 College Savings Plan is a valuable tool, but it's essential to explore all available options and ensure that your own financial health is secure. With the right approach, you can give your children a strong financial foundation and the skills they need to build wealth for the future.