Smart Giving

IF YOU GIVE MONEY to your children, either now or when you die, there’s a risk they will quickly squander the money you so painstakingly amassed. Faced with this risk, some folks set up spendthrift trusts that parcel out the trusts’ assets to the beneficiaries slowly over time. You could avoid that complicated and costly step if you raise money-savvy children, a topic we touch on in the chapter on saving.

In fact, you might use your gifts to help your children, test how financially responsible they are and teach them about money. For instance, if your teenage children have earned income—perhaps from a summer job—you could fund a Roth IRA on their behalf, contributing up to the amount they earned. A Roth, with its tax-free growth, will likely make more sense than a traditional tax-deductible IRA, because the tax deduction won’t be worth much if your children have only modest income.

When you fund the Roth, you might talk to your kids about how compounding works and perhaps use an online calculator to illustrate how much the money could be worth when they retire. An added bonus: The 10% tax penalty on early withdrawals may deter your children from raiding the account (though that penalty would only apply if they withdrew the Roth’s investment earnings, not the original contributions—but you don’t have to tell them that).

Alternatively, once your children are in the workforce, you might encourage them to contribute to their employer’s 401(k) plan by offering to reimburse 25 or 50 cents for every $1 they put in their 401(k). Similarly, to encourage your kids to save for a house down payment, you might offer to contribute $1 to their savings account for every $1 they contribute. With both strategies, you’re encouraging good savings habits while also promoting worthy goals like saving for retirement and buying a home.

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