Gifting to Help Adult Children with Retirement Planning

Posted on Thu, Feb 17, 2022 ©2021 Drucker & Scaccetti

GiftBy: Eve Zurakowski


It’s the start of a new year, and the perfect time to plan ahead for this year’s gifts. Annual gifts are not only a great way to benefit your children or grandchildren, but also an opportunity to teach them smart financial management. When we last wrote about this topic five years ago, we discussed teaching this to teenagers. Many of those teenagers are now young adults just starting their careers and may have access to retirement plans provided by their employers. This opens additional ways that annual gifts or cash gifts can be used to help them to maximize their retirement plan benefits early in their careers.


              The annual gift exclusion in 2022 has increased to $16,000 (per recipient) for gifts made by an individual, and $32,000 for gifts made by a married couple who agree to “split” their gifts. Gifting up to these amounts to a retirement plan for children or grandchildren could jumpstart the earnings on their investments.


Consider young adults who have been working for a few years in a career with retirement benefits provided by their employer. They, ideally, want to put as much money as possible into the retirement plan. As the blog we mentioned earlier pointed out, compound interest can do wonders when you put money in a retirement plan early. However, there are obstacles preventing young adults from fully utilizing their retirement plans. Their earnings, after essentials and housing expenses, probably do not leave a lot to contribute to their retirement plan and take advantage of their employer match, if offered. If they have student loan debt, it might make contributing to retirement plans even harder. Therefore, your cash gifts for young adults can be a great tool to help them prepare for their financial future and provide a life lesson on smart financial management.


Your gifts to young adults will help them accelerate their retirement plan returns and create tax savings. Different retirement plans create tax savings in different ways. Generally, there are three different retirement plan types: 1) traditional 401(k); 2) traditional IRA; and 3) Roth IRA or Roth 401(k).


If you have a traditional IRA or a 401(k), there is no tax collected on the funds you contribute. In fact, the funds contributed are deducted from your gross income; however, taxes are collected on distributions at retirement. If you have a Roth IRA or Roth 401(k), there is no deduction for contributions, but there is no tax due on the distributions in the future. Young adults are more likely in a lower tax bracket now, compared to when they are close to retirement age, since their income will likely go up in the future. By paying the taxes up front, and forgoing the deduction now, they can potentially save a lot of money by paying no tax when they receive the distributions, and the earnings grow tax-free in the Roth IRA.


As parents or grandparents, you can see that all of these retirement plans give young adults tax savings, and your gift to these plans can be a wonderful way to help secure their futures. Gifts are always a good thing, but a well-planned gift will benefit the recipient more in the future, compared to having extra money to spend now. Call on Drucker & Scaccetti if we can help you begin the conversation with the young adults in your life.

Topics: IRA, 401(k), retirement contributions, Holidy Gift, Annual Gift Exclusion

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