Financially Savvy Grandparenting - PART 2

It's time for another edition of Mr. Stillman's Opus, the financial advice and guidance podcast with Jon Stillman. Jon, how you doing? Doing great. Glad to see you and looking forward to this conversation.

This is part two of six tips for financially savvy grandparenting. You and Molly, your wife, tackled part one. Yep. Let's move on to part two. Do you want to give us a quick recap of what you covered in part one? Yeah. Hers was a couple of weeks ago where we talked about more from a parent's perspective of what are the things that you would like grandparents to do to help you raise financially savvy kids, or at the very least, not obstruct.

If that's relevant to you, go check out the podcast from a couple of weeks ago. It's called Financially Savvy Grandparenting, not part one because we didn't know at the time there would be a part two. Like the Battle of Bull Run in the Civil War. They didn't call it the first Battle of Bull Run after the first battle. It wasn't until they had a second Battle of Bull Run that there was a first Battle of Bull Run.

They also didn't call it World War One at first, and then World War Two came along. This happens to me in Microsoft Word quite a bit where I'll make a list of something, and then I want to go back and add an addendum, and so then I'll make it like 1B, but then I'll have to also go back in and change it to 1A because I can't stand it just being one and then 1B. I don't like skipping A, but then I assume you could have a whole debate or argument.

Can you have one and then 1A and 1B? I don't know. We're getting off track here. That's not very interesting. I'm not sure.

I get fascinated by the little details like that, but I'm kind of weird, so that's why. All right, so that was part one, or the original, if we want to put it that way, perspective of six tips for financially savvy grandparenting. That wasn't even six tips. Was it six tips? No, today is the six tips. Really breaking rules. Part two is the six tips.

I know, it's all very confusing. This is part two of financially savvy grandparenting. This is where we have the six tips. You got it. Let's get into the six tips. What do you got? Tip number one, do not underestimate the power of the Roth IRA for young kids. How young? Well, we'll get to that.

Okay. So, let's first understand what the Roth is all about. You put the money in, you pay taxes on it when you put it in, but it all grows tax-free. Which, if you're 40, is still a pretty good deal, because if you don't need that money for 20 years, that's 25 years of tax-free growth before you take the money out.

So, that's a pretty good deal. But what if you're 11, and you leave the money in until you're 65? That's a lot of years of compounding growth on that money. And so, if you can take advantage of that for your grandkids, that's a pretty powerful way to help them start saving. Because at the point that they get done with college, they have a 10-year head start on retirement savings. If you look at the difference in compounding of 30 years versus 40 to 45 years, it's unbelievable.

So, let's think about the rules, though. First of all, to be able to contribute to a Roth, you need to have an earned income. So, if you have a grandchild, they could be in college, they could be a teenager. If they have some kind of earned income that they're reporting on their taxes, then they can contribute to a Roth IRA. So, let's say your grandkid made $2,500 at some job. Well, they're going to report that on their taxes.

They're not going to pay any taxes, because they didn't really make enough. But you could say, look, I'm going to open a Roth IRA for you, and I'm going to put $2,500 in it. As far as the IRS knows, the $2,500 that they made is going into the Roth. That's how much they can put in.

It doesn't matter where the money came from. So, you could contribute to a Roth on their behalf. Maybe you don't want to give money to your grandkids, that's fine. But if you are going to give money to your grandkids, this is a good way to do it. Because you're not just handing them money that they're going to blow when they're 16, you're putting it in a retirement account for them, and they're going to have really some just incredible compounding on that over the course of time. So, just something to think about there.

Very cool. So, that is the Roth IRA, and you can start that very young for your grandchildren. You could start it even younger. Certainly, they have to have an earned income, like I said, to be able to contribute to a Roth. But, if it's a family business situation, you can actually work even younger in a family business than labor laws would allow you to work if it wasn't a family business.

Yeah, there's some extra ways to start it even earlier. All right, so that's tip number one for savvy grandparenting. What about number two? Number two would be understand how to actually help with college savings. So, as an example, any money that you put into a 529 plan in your grandchild's name, that's going to count against them when it comes time to apply for student aid and things like that. So, if you have some kind of arrangement where you're helping contribute to college savings for your grandkids, it's best if that money stays in your name, not in your kids' or your grandkids' name, because that's going to hurt them on their FAFSA forms when they're trying to get some financial aid. So, as an example, my parents give our kids $100 every birthday to put in their 529 account. If it's an amount like that, not a big deal, right? That $100 a year isn't going to grossly affect their ability to get any kind of financial aid down the road. However, if you're doing some kind of significant gifting each year to the tune of $1,000 or more, you're probably better off to keep that money in your name earmarked for your grandkids, earmarked however you want, just don't have it as an account in their name. Does that make sense? Yeah, it's a cool little trick. So, don't take away from the help that they might get from the FAFSA or the state or any sort of financial aid. It makes a lot of sense.

Number three, find creative ways to help kids have an appreciation for saving and investing. And I will actually turn to you, because you have a great story to illustrate this. Yeah, I've been chomping at the bit, even with the Roth IRA thing, because my grandmother, actually never call her grandmother, but when I call her Noni, nobody really knows what I'm talking about, but that's what she is to me. So, Noni and John would give me, not you, a different John. An older one. An older husband, an older one. I take it John is not your actual grandfather. He is not, but they've been married for as long as I've been alive. They live in New Jersey. I felt like John would be an odd name to call your grandpa.

Yeah. But no, he's a cool guy, and I always enjoy seeing them for Christmas. Anyway, they had a really cool idea for, there were sort of three of us cousins, the three of her grandchildren, that always got gifts for birthdays and Christmas and that kind of thing. But instead of doing the stereotypical gift giving of toys that might just get thrown in the trash a couple of days later or unappreciated, or maybe it was a duplicate of something we already had, she started from a very young age. In fact, as soon as I was born, every birthday and Christmas for the first couple of years of my life were savings bonds. Then she started, I think when we were all five, all of us cousins are all very close in age. At five, she started gifting us stock, and it was just 10 shares of Hershey, 10 shares of Disney, 10 shares of a power company, 10 shares of... But a lot of times it was fun stuff that we could identify with. Now she would couple it with a really cool, we'd always do a treasure hunt at Christmas where we'd go around and look for items, and that would lead you to the next thing, and then lead you to the next thing. Then finally we'd get to the end, and there would all be little trinkets that led to what that year's stock was, and usually we all got the same stock.

Anyway, this happens for 15 and 20 years. I graduated from college, and now that whole portfolio is mine, and I've been able to see it balloon with the pre-2008 markets, and then come crashing back down right as I graduate, and then get to see the swell and increase once again in those accounts, in addition to the buildup, and just an incredibly cool way to learn about stock, and money, and finances. And that was the down payment on your first house, as I recall, right? It was certainly helpful on the down payment, and basically my life savings plus some of the funds from that account paid for the down payment, and then used some of the other funds from that account to help with a lot of the moving expenses that when you're buying your first home you often underestimate, so those came in very handy.

Yeah, so that helped me basically get into a home at 26, 24 years old, 25. Really cool idea Yernone had there. Yes, indeed. Did you tell her that I've stolen this idea?

Oh, yes. I've told her how awesome it's been, and I mean, she's obviously very intrigued by what we do now kind of working in the financial realm. But does she know I've stolen the strategy with my own children? Oh, I don't know if she knows that. She will this Christmas when it's here. Yeah, so what we started doing- I'm going to send her this podcast, in fact.

There you go. I'm sure she knows how to listen to a podcast. She's getting there. She's getting savvy.

She's got a Gmail account and everything. That's stepping in the right direction. So basically, what we did with Lily from, I guess, her first Christmas was we got her a gift that correlated to a stock of some kind. And we've actually done it for Molly's nephew, Kyle as well.

This will be Amos' first Christmas here coming up. I guess we're pretty much roped into doing the same for him. But the idea is we get him a gift that is correlated to some gift of stock. So we didn't do 10 shares like your grandmother did.

Although, I guess, depending on the price of whatever stock it is. Like for Kyle, the first year I think we did McDonald's for him. So it was a couple shares of McDonald's stock. So maybe two shares and then one of those little kids' gift certificate booklets to go along with it. That's very cool.

So that was cool. And I don't think at two and three and four years old he really understands what's going on there. I guess he just turned six this year. So now he's got a few little things in his portfolio, if you will, that'll hopefully build up over the years.

Lily, certainly, she just turned three. She's too young to really understand it. But the idea is that she'll have several thousand dollars in stock at some point down the road.

It's awesome. And it was very cool to be able to buy my first home. And I think she was pretty tickled after because she got to see the payoff, too, of 20 years of gifting this to her grandchildren. And she basically helped one of her grandchildren buy their first home. And that was pretty cool to experience. And then to kind of put a cap on this story back to the Roth IRA example, that was I don't know if that was high school or college graduation, was one of the two. She opened up a Roth IRA with an initial deposit for me and then started contributing to that.

Very cool. Yeah, she's savvy. She knew what she was doing. So she went to Rutgers, I think. Oh, I'm sorry, Noni, if I get this wrong. I think when she was maybe 50, shortly after 50, she went back to school, went to Rutgers, and if I'm not mistaken, was the valedictorian for her class at Rutgers and then became the vice president of a bank for the rest of her career.

Sounds like a movie. Yeah, after basically being a homemaker for, well, all the kids were in the house. So she's pretty cool. Yep, that is cool. I tell you what, we're going to do the remaining three next week. Wow, so we're going to have a part three that's not really part three.

We're going to have part three of financially savvy grandparenting. Wow. So we've had part kind of one, part two, and now an official part three. Very good. Cool. That was good.

I love the Noni stuff. You can tell her that we stole it. And not only now for my own kids, but now all my clients will want to do the same thing. How many grandparents have given their grandchild a stock in Harley Davidson when they were like 10?

Yeah, that's awesome. Well, and I would have to imagine there's some pride for her, too, to see you not squander that money when you're 15 or 16. To actually save it and do something worthwhile with it.

Now, if we can spend one more minute talking about this... We can, because we're going to punt the risk to next week. Exactly. So, just from my personal learning perspective, it was great to buy the house, but it's funny to look back and see when I sold some of those stocks that we had held on to for all those years to be able to make that purchase, but now to look at where the stock market has gone even above and beyond where we were in 2012 when I bought the home, and to be thinking about what that account would look like now. So it still gives you that perspective, and now I think I would learn from that again. You got to take your gains when you can get them, but it's a great example of like, wow, if I'd held onto them even a couple more years, look at what they could have grown into.

So that gives you great perspective for saving many, many years down the line. Good job, Noni. Well done. Yeah. This has been Mr. Stillman's Opus. Thanks for tuning in. We'll see you for part three next week.