Today, Paula Christine is joined by listener Elizabeth, mom to a two-year-old daughter. And she has questions about how to best protect her child, financially.
Importantly, she has a 529 College Savings Plan set up for her. And with recent updates to the SECURE Act, that money is now more flexible. If her daughter ends up not using that money for qualified educational expenses, it can be rolled into a Roth IRA later on.
Speaking of Roth IRA's, Elizabeth also wants to know how early she can set up a Roth IRA for her daughter. Turns out, there's no minimum age, but the child has to be paid wages. And we get into some interesting ideas on how this could work, even for a baby!
We also talk about life insurance -both for parents and baby. Life insurance is critical, so that the income of a parent can be replaced if something happens to them. And for the baby, Elizabeth asks about a Gerber plan. Paula talks about something similar she took out on her own kids.
The most important thing you should do for a child is to designate a legal guardian in the event something happens to his or her parents - this is explained well by Shannon DeWall in last week's episode.
It's also crucial that you take care of your own finances, not just your kid's. Too often, parents focus on providing for their kids before themselves. And if your own financial house isn't in order, that will put the burden of taking care of you onto your children.
Need help with your financial future? Learn more about Paula and her work at PaulaChristine.com or send her an email: Paula@PaulaChristine.com
Paula: Hi, welcome to be on the Paycheck. I'm Paula Christine. Today we're
being joined by one of my listeners, Elizabeth, who has some questions for me, which will be quite a surprise because I don't know what the questions are. So welcome, Elizabeth.
Elizabeth: Thanks for having me.
Paula: So what is your first question?
Elizabeth: I had a baby almost two years ago, and I'm trying to catch up on some of the things that we probably shouldn't have been doing for her the whole time.
We have a 529 set up for her and a savings account that her grandfather set up for her. And then I was just trying to think what other things we need to be doing and how much should we be putting aside for those sorts of things. How do we set her up for success?
Paula: Congratulations, by the way.
Elizabeth: Thank you.
Paula: I think you've pretty much have it set. The 529's for school. Are you in Michigan?
Elizabeth: Yes.
Paula: Okay. You can look at the MET program, which is that prepaid tuition. But I think the 529 myself is one of the better programs, and they just came out with a new change with the Secure Act.
And with the 529, which I think this is amazing, in 2024, as long as the account's been open for 15 years, which I know your daughter's has not, but has been open for 15 years, you can take the annual contribution limit from the 529 and transfer it into a Roth IRA up to $35,000. I think that's huge because my grandson who's seven, his birthday was actually last week.
He goes, grandma, what do you gave me of birthday? I said, I'm make putting money in your college plan. I bought him a gift. But I'm putting money into your college plan. He's like, grandma, what if I don't go to college? So we had to have that conversation and I think this is just perfect.
So if he doesn't go to college, then we can use it to roll into his a Roth IRA for him.
Jon: I'm really glad that you brought this up, Paula, because what's so great about this new rule that just went in the Secure Act 2.0 is the money's going into a 529 plan for the benefit of Elizabeth's daughter.
But if she decides in 16, 17 years she doesn't wanna go to school, that money can go into an IRA and be used elsewhere. It's not lost. And I love that new provision of the law.
Paula: Oh, I think it's fantastic. Because you think about it, if the child doesn't go to school, I mean your only options are transfer it to another child or you can withdraw it and pay a 10% penalty on all the gain as the owner. So I think it's a fantastic role. No, that's great. Does that answer your question?
Elizabeth: Yes. And I had one other question. So I am an entrepreneur and I've heard a lot of people talking about how you consent up your child as an employee and you can start a Roth IRA for them early.
I was just wondering like how early is too early? When does it make sense to do that so she can reap the benefits of that? What should I be thinking about or how should I plan that?
Paula: So from what I understand, she would actually have to be able to do some work. So it's not that you could put like your five or six year old on the payroll.
Because there's nothing that they can really do at that age. I did it for my children when they were in their teens. They would come to work and if they were to clean the office or helping files or do something like that, and I paid. But they really have to be able to do the work. Some sort of work.
Jon: As I'm Googling it right now, as we're sitting here, on Fidelity's website, they say a minor with earned income, so there's not a specific age limit, but the bottom line is they have to be able to work. Your daughter actually has to be able to work.
Elizabeth: Yeah. They've heard of some people even getting their babies modeling jobs or something like that. So then they will receive an income and they can start it as early as possible.
Paula: But they'll be receiving a 1099 or a W2. Yeah. And so when you have earned income, then you can contribute to a retirement account.
Elizabeth: Like even if they do a one-off job, you could still open it and it would be able to stay open then.
Paula: Correct. Once you open it, it's open. You can contribute down the road.
Jon: I like the way she's thinking cuz even if you weren't working for a while, once it's open, that interest is gonna grow even if you're not still working and adding to it.
Elizabeth: Correct. Yeah. So I was even thinking, that wasn't something on my radar, but I'm like, oh, maybe I do look for a modeling job for her and just do one and then we're set.
Paula: Yeah, think about that. At least they get it started. Yeah. And then what do you do for our living?
Elizabeth: I'm an entrepreneur, so I have a marketing firm.
Paula: Okay, so you could use her in your marketing as a model?
Elizabeth: Yeah, . I'd have to think about how to do that, but yeah, I could do that or I could find an opportunity for her as a baby.
That would make sense, and that might be a really good opportunity to start her Roth savings even earlier.
Paula: So let's talk about you for a second. Since you are an entrepreneur and a lot of us entrepreneurs don't put enough money away because we reinvest back into our businesses. But there are some tools that you can use. Do you have any employees?
Elizabeth: Right now I have contract employees, so not full-time employees.
Paula: Okay. So you're eligible to do a SEP IRA or a solo 401k. So that's some things that you might wanna think about because even myself as an entrepreneur, I have to set up my own retirement savings.
I don't have an employer that does that for me. So we have to make sure that we're taking care of you also and making sure that you're saving for your retirement.
Elizabeth: Yes, I do have an IRA that I used when I rolled over, like previous work IRAs into that IRA. So I do have an IRA that I use.
Paula: If you do like a solo 401k or a SEP IRA, you can put a lot more away than you can just with your regular IRA contribution.
Elizabeth: Oh, great. I'll have to take a look. I didn't know there was a difference. I just knew I had an IRA.
Paula: Yes, there's a big difference. So the contribution limit for 2023 and a solo 401k is up to $66,000. With an additional catchup, if you're over 50, of $7,500, that's a lot of money. If you think about it, rather than putting in just to a traditional IRA, which is what, $6,000? So something to think about. And that goes for you too. Jon,
Jon: I am listening with baited breath. We should move on to Elizabeth's next question.
Elizabeth: So that sets my daughter up for her savings as we work for that. So what about setting up contingencies for emergencies or if something happens to me and my husband, should I be setting up a trust?
What should I do? We need to go back and get those things handled.
Paula: Okay. We actually talked about that on our last podcast with Shannon Dewall. And the big thing that you need to set up is guardianship. So if something were to happen to you and your husband, there's someone that you have appointed to take care of your daughter.
A lot of people fail to do that and it can be done in a simple will, but it needs to be done. Cuz if it's not done, then you're gonna have people petitioning the court and the court's gonna then make the decision on who raises her. So that's very important. Because it could be the person you don't like and that would be the worst thing.
Jon: You brought that joke back from last week's episode, Paula. It was a good one. .
Paula: Yeah. I just think about that. Could you imagine the sister that you or sister-in-law that you. Just can't stand, gets to raise your children? It's gonna mix my skin crawl. Anyway. Also, you want to have left some life insurance.
So even if it's a term policy and a term policy is just covers you for a certain number of years. So if your daughter's two, and let's assume she goes to college and she graduates at 22. So if you looked at a term policy for 20 years now, the amount will be, you know, there's some calculations that have to go into determining how much that is.
And if something were to happen to you or your husband, then you know that she would be taken care of. Her college would be taken care of. So what else would you need? Now, you need to protect yourself, first and foremost, or your spouse. So you would wanna make sure that you guys have life insurance, that one of you were at a pass away, that their income when we be replaced, so that your lifestyle doesn't change. Does that make sense?
Elizabeth: Yeah, that makes sense. My husband has one, but I used to have one through previous employment, so I don't have one now as an entrepreneur.
Paula: No, we need to get you a term policy. I even have a term policy on myself, and I have it until age 65. I no longer need it, to be honest with you because I'm divorced, but it was just in case for some odd reason.
Ex-husband and I hadn't saved enough that we knew that if one of us passed away before we retired, that extra money would help fund our retirement.
Elizabeth: That makes sense.
Paula: I don't need it. I still keep it. It'll just go to my children. And they can use it for whatever, maybe they'll put it away for their retirement savings.
Yeah. But you really need to look at it/ and they're so inexpensive, that it doesn't make sense not to have one.
Elizabeth: We've been getting to the point where a lot of our friends have been having health issues, and I've really been thinking about that. That could happen at any time. And then you might not be able to get a policy if you have something happen to you or an illness or something that comes up.
Paula: Yeah. The first thing is that you have to be insurable and, if you have a heart attack, you can still get insurance. You might just have to wait. SO that they know that everything is back to normal. Even with cancer, sometimes you can still get insurance, so it's a little bit more flexible than it used to be.
In term policies are a little bit easier because, again, it's just for a short period of time. So let's say we have guardianship, we have life insurance, and potentially you would need a trust because you would actually, you'd have that life insurance paid to the trust and then that money inside the trust would be used to take care of your daughter.
Elizabeth: Oh, and I thought of one more thing. I saw in one of my mom groups online was there is a plan through Gerber, and it's called the Gerber Life Grow Up plan, and you get it for your baby. It's like a life insurance. So you get them $50,000 in coverage initially, and then it becomes $100,000 when they turn 18, and it builds cash value over time. And they can borrow against it. They'll have coverage for life. And the reason people were talking about it was because as a baby, you're the most insurable you ever will be.
Paula: Correct. I have something similar on my children. Yeah. Although they're all adults. But the policy will stay with them for the rest of their life.
But I put it on them when they were babies. And this is just a sad thing to think about. . What if something happens to the child and then you hear of a lot of people don't have the ability to pay for the child's funeral. And having that life insurance on the child too, is also, I don't wanna say a benefit, but it can help out if that were to happen.
Elizabeth: Or if they're in an accident or if there's any kind of health issue you have to go through. Those things could be very expensive. So if you had something like that to borrow from.
Paula: Those typically don't accumulate a lot of cash value. Because in order to accumulate a lot of cash value, you have to put a lot of cash into it.
Elizabeth: That makes sense. Yeah, I talking about it where it was great because then when they turned 18, they could either keep it for the rest of their life or they could take the money and do something with it, or there was lots of options. So it's just another little thing you could do to give them another option.
Paula: That's a great point. So I still actually pay the premium on my children. I don't even think they know that I have them for 'em. I probably should give them to 'em so that they can make the premium. But I have $75,000 on each of them, and I think my premium, it's like a hundred dollars or $200 a year for them.
It's so inexpensive, but it's not gonna accumulate a lot of cash value. I didn't do it for that purpose. I just basically did it for a death benefit if something were to happen to them. And then they have that insurance for the rest of their life. So if they got sick, they would always have some sort of insurance. So great idea.
Elizabeth: Yeah, that's one of those threads and people were talking about all the things that you could do for your kids. So that's what got me thinking about all of this. And I have nieces and nephews too. So once we'll get that set up, we can get everybody set up and try to make sure that they're all ready to take on their lives. Set up for success.
Paula: I agree with that, but I also go to the other side of that, that you wanna make sure, first and foremost, that you are set up. And then get your children set up. Because a lot of people start to worry about taking care of their children and end up not saving for their own retirement.
Or they'll put money in the college plan, but they won't put money in their own retirement accounts. First and foremost, you need to take care of yourself. And then the children.
Elizabeth: That's a great point to make sure that you're not leaving your children with the burden of taking care of yourself. Thank you so much, Paula, for taking the time to answer my questions today.
I really appreciate it. You've given me a lot to think about and a list of things to look into.
Paula: You're welcome. Thanks for being our guest today. If Anybody'd like to get ahold of me, you can reach out to me at paula@paulachristine.com or you can check out the website at paulachristine.com.