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Financial Partnering + IRAs: “Charity” Begins at Home!

| September 28, 2017
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For many of us, giving to family members on birthdays, certain holidays, and special occasions, such as a graduation or wedding, is something we accept and do willingly as part of family life. We usually don’t think of this type of giving as “charity” in the same sense as giving to outside organizations. Yet, if you think of “charity” as giving to organizations whose work you support, why not turn it around and show your support on the home front? 

You might want to jump in here and say that raising children and trying to save for sending them to college is support enough—and who could argue with that? However, if your children have earned income from summer employment or a part-time job during the school year, you might be able to give them a running start toward financial security by helping them fund an Individual Retirement Account (IRA). And, by acting as their financial partner, you will be reinforcing the values of working and saving. 

Financial “Partnering” in Action 

Let’s assume that in 2017 your 17-year-old daughter Sarah will earn $10,350. For tax purposes, $6,350 can be offset by the standard deduction for a single filer, leaving $4,000 of taxable income (if Sarah is still your dependent, she would not be able to take a personal exemption). At the 10% tax rate, Sarah would owe $400 in federal income tax ($4,000 x .10). 

Because Sarah has earned income, she could make an IRA contribution, in this case up to $4,000. Moreover, since she is under the limit for a fully-deductible IRA contribution, she could deduct the full $4,000 contribution, thereby reducing her taxable income to zero ($10,350 gross income less $6,350 standard deduction less $4,000 deductible IRA contribution), and saving $400 in taxes. 

However, the IRA contribution does not have to be made from one’s own earned income. To reward Sarah for her hard work, you (or her grandparents) could give her $4,000 to cover the IRA contribution. 

You might argue that you want her to learn the value of “paying yourself first,” and that she should make the IRA contribution out of her own earnings. However, you could give her a gift that would fully (or partially) fund her IRA contribution this year and then scale back future gifts over a period of years so  she will gradually assume the full responsibility for “paying herself first.” 

The key here is that Sarah must have earned income in order to make an IRA contribution, and that her maximum contribution is the lesser of $5,500 or the amount of her earned income for the year. In this case, since her earned income is $10,350, her IRA contribution would be capped at $4,000. 

The Payoff of “Partnering” 

Teaching your children the money “facts of life” need not be a daunting task if you make it a shared experience rather than a lecture. The goal is to have your child learn to be responsible about money before having to face the pressures of making a living for oneself. 

By becoming your child’s financial “partner” early, you would be rewarding the values of working and saving. Expand your charitable instincts—let giving begin at home!

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