Money Rehab with Nicole Lapin - How To Make Your Kids Millionaires

Episode Date: April 25, 2023

Do you have kids? Do you want them to be wealthy from the womb? Yeah, we thought so. Today, Nicole shares three tips that parents can use to set their kids up for financial success. Plus, Nicole shares how you can turn $13,000 into $2 million for your kiddos.

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Anyone who tells you money can't buy happiness has never truly been poor. Because sure, while money doesn't guarantee happiness, not having money is a pretty big bummer. Now, if you've been listening to the show for a while, you know I did not grow up with money. Not only that, but I had an experience with a family member actually opening credit cards in my name and wrecking my credit before

I turned 21. And while those experiences definitely taught me, you know what would have been easier? Not having to learn those lessons the hard way. So today, let's talk about how to set your kids up right for the future. And don't worry if you don't have kids, I even have a sneaky tip that you can use for yourself regardless of whether or not you have kids. Let's start with education because getting a great college education can have a huge impact on your kids' eventual income. But paying for college gets more and more expensive all the time. And as you may know from personal experience, college debt can really hang over a person's

life well into their career. So net-net going to college can either help or hurt you financially, which makes it really hard to make what feels like the right decision. Luckily, there's one kind of investment account that can help you with this. It's the 529 plan. The most popular kind of 529 plan is the savings plan. With a savings plan, you pay tax on what you contribute, but withdrawals are tax-free if you use them for qualified education expenses like tuition, room and board, and so on. Plus, in some states, you might be eligible to

deduct your contribution from your state taxes. Now, if you take out the money and don't use it for school expenses, there's a 10% penalty. But that penalty can be avoided if the beneficiary on the account got certain types of scholarships. And if the planned beneficiary gets a ton of scholarships and doesn't end up using this money, up to $35,000 can be rolled over into an IRA for the planned beneficiary on accounts 15 years or older. So this account can be used not just to fund your kid's education, but for their retirement as well. And that's what you call setting them up for life. You can open this type of account at a brokerage to benefit a specific person, usually a child or grandchild. But fun fact, did you know that you could set one up to

benefit yourself? I found this is somehow one of the financial world's best kept secrets. So if you dream of one day getting your MBA, and although I would argue an MBA might not be necessary, if you've decided it's the right move for you, get on with your bad self and start investing in you. As long as the beneficiary, again, get on with your bad self and start investing in you. As long as the beneficiary uses the money in the account for school-related expenses like tuition and the school meal plan, that money is tax-free to withdraw. Okay, so remember I said you could roll over a 529 savings plan into an IRA in some cases? That isn't the only way to start an IRA for your child.

There are two ways to go about this. One, if you're a sole proprietor or in a limited partnership, you can hire your kid. This is one of those things that sounds totally illegal and like it's breaking all the child labor laws and employment bias laws. But this is actually perfectly legal. Now, a caveat, they do need to work and it has to be work that is kosher for them to do. You can't hire a two-year-old to work at your contracting company. You can, however, hire them to model for your greeting card line. So if you have appropriate work for your kid to do and they're working for you, your company can employ your child and put that money into a custodial IRA for them. You can pay them enough for them to be able

to make the max contribution of $6,500 a year. But here's where it gets really good. Because remember, the first $13,850 anyone earns is tax-free. So if you pay your child that salary, they don't need to pay tax on any of it, and they can max out their IRA deduction. Plus, the salary you pay your kid is deductible on your business taxes, like any other wages paid to an employee. But you can still claim your child as a dependent and take any child tax credits you're eligible for. That's like a four-level win. And it may sound like a couple of steps and potentially a decent amount of work, but the payoff for your kid can be huge. If you do this twice, like just twice, the first two years of your child's life, they will retire with almost $2 million.

they will retire with almost $2 million. So that's $2 million for contributing $13K over two years. That's freaking amazing. If you don't have your own company, you can still open a custodial IRA for your children. Now, they can only contribute as much money as they make in a year up to the max contribution level, meaning that your kid still needs to be making money, even if you're not the one employing them. But if they're scooping ice cream for the summer, they, or you, can contribute as much as they want up to the contribution limit to their custodial IRA for the year. So if your little entrepreneur has a side hustle, you can help them self-report that income, even if it's just a couple of hundred dollars from babysitting,

and contribute that amount to their IRA. Okay, now are we really ready to level up? Here's another tip. You can add your kids to your credit card and help them build good credit from a very early age. Now, some credit card companies have age limits, so I can't make any blanket statements about when you can start this. But the first step here is to ask your credit card company if they can make your child an authorized user on your credit card. Then the credit card company issues them a card, and you can either give it to your kid or not.

But whoever has the card, them or you, can start building your kid's credit. Other than the risk of your kid going ham on the credit card, there's really no downside. There's no credit hit for you when you add them, and there's major upside for them. I mean, I think most of us can relate with having very little credit history when it came time to rent your first house or apartment and struggling to get that lease. Can you imagine having a perfect credit score by the time you turn 18? Yes, please. This can also help you out getting better rates on their student loans. So this is an easy way to set your kid up right. But remember, they only get that good credit if you use your credit card

well. So the biggest advice I have for parents is if you want your child to be financially responsible, be financially responsible yourself. They're watching every money move you make, and chances are they're going to emulate that. The bad or the good. For today's tip, you can take straight to the bank. Another way to the good. For today's tip, you can take straight to the bank. Another way to help your kids is by having a life insurance policy for yourself. I know you don't want to think about this. I don't want to think about it either. But if your game plan is to earn money to leave to your kids as inheritance and something happens to you, God forbid, and wipes out those earning years, you need to have plan B. Check out the money

rehab episode on life insurance that's linked in the show notes to help you find the policy that's best for you and your family. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehabatmoneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No,

seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.