Gifts With Interest

Larry Sayler

FOR 10 YEARS, MY WIFE and I have given each of our four children $5,000 to $6,000 per year for them to put in their respective Roth IRAs. So far, we have given each of them about $60,000.

They were amazed a few years ago when their investment gains for that year exceeded our annual contribution. Today, their Roth accounts are now each worth about $125,000, so their cumulative growth—about $65,000—now exceeds our total contributions.

We began in March 2012, when our four kids ranged in age from 23 to 31. We gave each of them $5,000, which was categorized as a 2011 IRA contribution. That December, and each subsequent fall, we gave them another $5,000 to $6,000, depending on IRA contribution limits. From the start, the money has been 100% invested in total stock market index funds.

We love our children. They’re great kids—caring, hard-working, creative. But 10 years ago, none had a high-paying job. They weren’t interested in financial matters, probably because they had little money. In the beginning, my wife and I told ourselves we would give them money for at least three years.

Legally, once the money is in our kids’ accounts, it’s theirs. They can do what they want with it. My wife and I view it as their retirement funds, however. To receive our contributions, they must allow us to view their accounts online. We’re very clear. If they withdraw money early, they’ll get no more deposits from us.

We set up these Roth IRA accounts at Vanguard Group, where we had our investments. I did most of the setup work, although our kids did have to complete some paperwork. Recently, we moved our accounts, and our kids’ accounts, to Schwab. At either place, the annual transfers have been easy. We simply transfer money from our accounts to our kids’ accounts.

We have had two major bumps along the road:

  • Lack of earned income. People can put money into a Roth IRA only to the extent that they or their spouse have earned income. Two of our children have had years with no earned income. For those years, we opened a non-IRA account in their name and put the money in that. Of course, this money does not grow tax-free.
  • One of our children is facing divorce. We realize that half of their IRA may go to that child’s soon-to-be ex-spouse. We’re okay with that. We like that person and we are sorry for their divorce.

By making contributions, we hope our kids will learn something about investing and the financial markets. I especially hope they embrace two crucial lessons.

First, U.S. stocks are a good place to invest in the long run. I don’t know what will happen during the next 60 years, but I hope the U.S. stock market will continue to be a good place to invest during our children’s lifetimes.

Second, during a market drop, they shouldn’t panic and sell everything. There has been only one year, 2018, in which their accounts have shown a loss, and that was a loss of just 8%. I wish we had a few years with greater losses. I want them to realize that, for a long-term investor, a significant loss is not a time to panic.

My wife and I plan to continue contributions indefinitely. In another 10 years, with additional annual contributions and reasonable growth, their accounts should be worth $250,000 each. If my wife and I are fortunate enough to be alive 20 years from now, their accounts might be worth $500,000 each. That will be $2 million that otherwise would have been in our estate.

I’m concerned about estate taxes. For 2022, federal estate taxes do not kick in unless a person’s estate is more than $12 million. We are well below that amount. In 2026, if Congress does nothing, the threshold will drop to about $5 million. But Congress can change this exemption amount at any time. We would much rather give our money to our children and charities than to the federal government.

Each year for Christmas, we give our children a nice card with a letter and a spreadsheet. The spreadsheet shows, for each year since we began the program, their beginning-of-year balance, our contributions, their investment gains or losses, and the end-of-year balance. I want them to see the big picture of the progress their account has made.

My wife and I can do this for our kids because we have accumulated a nice nest egg. We are not wealthy, but our needs are modest. Our portfolio continues to grow, and we are withdrawing just 2% to 3% each year. We use withdrawals for these transfers to our kids and for the taxes associated with some significant IRA conversions that we’ve been making in recent years. Otherwise, we pretty much live on just Social Security and a small pension.

There’s a saying that, “The best time to plant a tree was 20 years ago. The second best time is now.” Perhaps we should have started this program earlier. We’re glad we didn’t wait any longer.

Larry Sayler is the only person with a Wharton MBA who also graduated from Ringling Bros. and Barnum & Bailey’s Clown College. Earlier in his career, he served as CFO for three manufacturing and service organizations. For 16 years before his retirement, Larry taught accounting at a small Christian college in the Midwest. His brother Kenyon also writes for HumbleDollar. Larry’s previous article was Making a Difference.

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