In today’s podcast, I invited Tim Tenbrink, CFP®, back onto the show. Many of the people we serve are not only interested in how to make the most of their retirement, but they’re also in a position where they can think about how to use their wealth to make a meaningful difference for the next generation.

There are a number of different ways to give to children and grandchildren, and how you give can be just as important as how much you give. Tim and I have several ideas to share with you today that can help you think more strategically about giving and building generational wealth.

I know you’re going to enjoy this conversation. And as always, the transcript, along with articles, links, and resources, will be available at Sound Retirement Planning. Just visit SoundRetirementPlanning.com and click on episode 479.

Articles, Links & Resources:

Compound Interest Calculator
529 Savings Plans – College
UTMA / UMGA Custodial Accounts
Custodial ROTH IRA

Transcript:

479 Beyond the Birthday Gift – Smart Ways to Build Generational Wealth

Announcer: Welcome back, America, to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement. And now, here is your host, Jason Parker.

Jason Parker: America, welcome back to another round of Sound Retirement Radio.

You’re listening to episode number 479. The title is Beyond the Birthday Gift: Smart Ways to Build Generational Wealth. In today’s podcast, I invited Tim Tenbrink, CFP, back onto the show. Many of the people that we serve are not only interested in how to make the most of their retirement, but they’re also in a position where they can think about how they can use their wealth to make a meaningful difference for the next generation.

As always, the transcript, along with articles, links, and resources, will be available at soundretirementplanning.com. Just click on episode number 479. But before we get into today’s show, let’s start out by renewing our mind. Ephesians chapter 2, verses 8 and 9: “For it is by grace that you have been saved, through faith—and this is not from yourselves, it is a gift of God—not by works so that no one can boast.”

And then something fun for your family. Why did the student eat his homework? Because his teacher said it was a piece of cake. What do you call cheese that’s not yours? Nacho cheese. Nacho cheese.

And without any further ado, here’s my conversation with Tim Tenbrink. Tim, welcome back to Sound Retirement Radio.

Tim Tenbrink: Thanks, Jason. Good to be with you today.

Jason Parker: I love this topic that we’re talking about today, this idea of grandparents helping the next generation, and that could be their kids or grandkids. Um, we’ll, we’ll do a future podcast where we talk more about giving to charity, but today we’re- we really wanna focus on giving to the next generation directly and what are some of the strategies around doing that.

And one of the reasons I think this comes up is because when we’re doing financial planning for people, when we’re doing retirement planning, we always like to say, “Let’s hope for the best, plan for the worst.” As a result, we end up with making really conservative assumptions about the growth rate of their assets and about inflation and their spending.

And so a lot of times, what ends up happening is every year when we’re reviewing their plans together, the numbers are looking better and better, not worse and worse, because we make such conservative assumptions from the get-go. And then by the time people start getting into their 70s and 80s, they end– they just realize that they ha- they’re gonna end up with a lot more money.

They’re not gonna be able to spend all of the resources they have. And so they’re really thinking about, “Well, how do we get the money to the next generation? What’s the most efficient, effective way to do that?” And in some instances, uh, depending on the state you live in, you could end up with state estate tax or state inheritance tax.

And if your, if your state’s big enough, you could also end up with federal estate taxes. So grandparents are saying, “Boy, you know, if we can give these assets, get this money out of our, out of our estate, give it to our grandkids or our kids earlier, um- Then, you know, they’re, they’re, they’re accomplishing all types of different goals from helping the next generation, potentially paying less money in taxes, and really blessing the people that are most important to them.

Is there anything else that you found when having these conversations with people?

Tim Tenbrink: Yeah, I think you hit the nail on the head there, Jason. There’s a twofold approach that we’re talking about. There’s the practical from a financial planning standpoint that some people are in a situation where we are thinking about future estate taxes, we are thinking how to reduce those, in which case lowering the overall assets in the estate.

These are some of the vehicles that we can look at. But a lot of our clients when we talk to them, things have gone well and they’re starting to think, “Okay, we’ve got plenty for our lifetime expenses. We don’t want to wait until we die for this money to then maybe be a blessing to our, uh, grandkids, may- maybe even great-grandkids.”

And so when we see them just starting out on their journey, they’re thinking, “Maybe how can we get them on a good financial path? We’ve got means to do so. Instead of just waiting and leaving this money when we die, what can we do now?” And I think that’s the twofold conversation we typically are having with clients.

And, um, you know that idea of, uh, I think when we talk with our people they’d say, “I’d rather give with a warm hand than a cold hand.” I love that. “I’d like this- I’d like to see, you know, the difference that this is going to make now by doing this gift, doing this transfer to help maybe, uh, pay for college, buy their first house, maybe buy their first car,” and a multitude of reasons, “But I’d rather step in and help them now than just leave the money when I die and don’t even necessarily know what happens with it.”

So that’s kind of what, why we want to be talking about some of these vehicles to help facilitate that mindset.

Jason Parker: That’s awesome. That’s so good. Well, today we have seven different ideas that we want to share with our listeners, and the first one are UTMA/UGMA accounts. So will you share with our listeners where these come into play and how people might be thinking about them?

Tim Tenbrink: Yeah, and I think, Jason, before we kinda even talk about the individual vehicles that we’re gonna discuss today, I kinda have a mantra that when we’re talking about gifts and transfers from, you know, one generation to the next, the best gift or transfer that you can make to a young person is the wisdom that allowed you to accumulate that wealth in the first place.

So we’re gonna talk about very practical ways to do it, but I think we’d all agree that just giving somebody money without the wisdom that allowed you to gain that money, the best s- the best path you can put young people, whether it be grandparents, um, with grandchildren, or even your parent or your children if they’re younger, is just also with that gift saying, “Oh, okay, here’s how we came about a- achieving this wealth.

Here’s how we accumulated it.” And, um, when we think about stewardship, you’ve got an individual stewardship, but we wanna pass that wise stewardship on to the next generation. So just keep that in mind, I think, as we transfer wealth. We wanna help them manage that in a way- Mm-hmm … that’s gonna allow them to be wise, which is how you accumulated that wealth in the first place.

Jason Parker: now- One wa- But- Now that’s awesome. I love that you said that, and the practical, the reality of it is how we see that come into play, at least how I’ve seen it come into play, is I see… Well, my mentor Dean, you know, he did a ski trip with his family every year, and they were very intentional about spending time together, bringing the whole family together.

They’d go up into the mountains and rent a cabin together, and then go skiing and have fun. And of course, um, it was mostly having fun, but there was also some mentorship and some leadership and some wisdom being, being shared those evenings over d- the dinner table. I’ve also heard families take, like, a family cruise where they’ll take the entire family on a cruise, and part of that time together is to share that wisdom.

And so I think that’s so good. What are some other ideas that you have for should people be writing it down? Should they be recording short form videos to share, uh, with the next generation? I mean, how do we… Somebody once said that your kids are gonna s- learn a lot more by what you do than what you say.

So obviously living this out is important. But do you have any other thoughts or ideas about that intentionality?

Tim Tenbrink: Yeah. Well, I think conversation is the key piece there. You know, you’ve got to, instead of just sending a check, you’ve got to talk about, um, okay, how can this… how can you train your, the next generation about money and how it works?

And, you know, if we’re talking about some of these vehicles where you’re able to provide an investment, talk about, okay, how to wisely invest that in a way. And, um, you know, a lot of the, the, the vehicles we’re talking about y- require a custodian, and it’s instead of just saying, “Okay, you’re gonna be hands-off with the ch- with the child, the beneficiary,” how can you bring them along on that journey to, so that they can see the power of compounding, the power of how investments will work for you?

And I think of, I, I have a good friend who is a grandpa that was telling me about a recent conversation with his grandchild who is, um, you know, working to save some money. He wants to buy a laptop, but they were talking about investing. He took him to McDonald’s, uh, for lunch, and then they were talking about just, you know, different companies and how the, the stock market works and how you’re investing in companies like McDonald’s when you own their stock.

And so, you know, these companies that they can understand and are familiar with, it’s how can I translate that into, “Hey, you’re not just a consumer here, but you’re an owner-

Jason Parker: Hmm.

Tim Tenbrink: Love that … if you, if you own stocks in these companies.” Well, that’s a whole new world in a sense for a young person to understand.

And so just having those conversations or teachable moments that, um, you’re just having lunch, but then you can discuss that. And I’ve had that with my own kids, just thinking about, “Hey, what are these companies that you guys know and we use? Well, hey, if you’ve got some index funds and you’ve got some investments, you’re actually a part owner in those companies, and that’s how the economy works.”

And so just preparing them to be wise investors down the road by just ta- just talking about it.

Jason Parker: Yeah, and implementing, getting them to think as owners. Um, that is so critical to realize that when you’re an investor, um, you’re not gambling. You, you become an owner of a business, and that is such a great, a great way to help the next generation understand.

I, I love that, Tim. All right. So let’s get into some of the different tools that are available to, to give. And of course, people give g- just give cash directly to the kids and grandkids, and a l- we have a lot of clients that do that. Come, you know, usually November, December, they’ll give the kids a, a chunk of money.

And there’s, um, this year, 2026, the federal annual gift tax exclusion is $19,000 per person, so we have to keep that number in mind oftentimes when thinking about these different strategies. But, but let’s dive into the different tools.

Tim Tenbrink: Yeah, so the first one we’re gonna chat about is, uh, either UTMA or UGMA.

An UGMA or UGMA is the older version. UTMA’s kind of the more modern version. Important piece, piece to know there, the main difference between the two, in UGMA you can only hold financial assets. In UTMA allows you to hold things like real estate, vehicles. So there’s other, um, tangible assets that can be included in an UTMA.

Primarily what we’re gonna be discussing is the idea of holding, you know, equities in those stocks and bonds, but it is available to transfer assets into an UTMA that would be non-financial assets And the thing about an UTMA and an UGMA is really the flexibility. Why would someone want to open this type of account?

You can think of it as a brokerage account for a minor, in a sense. Minors can’t open up their own brokerage account if they’re under the age of 18. This allows them to get a start with a custodian who’s gonna oversee those investments, allow them to get some in- i- investments started at a younger age, and then when they, depending on your state, reach the age of determination, that then transitions into their own brokerage account.

So it’s allowing them to get a start at an earlier age, allowing that, you know, like we said, that transfer to maybe take place. You can fund this with a cash gift. You can even transfer maybe stocks individually or, or funds to these accounts. So a lot of flexibility there, and that’s what the main idea of an UTMA and UGMA gives you, is flexibility.

Jason Parker: Now-

Tim Tenbrink: These… Go ahead.

Jason Parker: Oh, I was just gonna say, so on the UTMA, on the UGMA, um, you used a word there, age of determination, and so for our listeners, that means the money becomes the child’s at a specific point in time, and that’s usually somewhere between 18, 21, or 25, depending on the tool that you’re using and the state that you live in.

Exactly. So, so soon as a grandbaby’s born, you might say, “Hey, look, let’s start putting money into this UTMA, this Unified Transfer to Minors Act account,” so that when they maybe turn 18 or 21 or 25, they’re gonna have this pot of money that’s been compounding and growing for them, not necessarily for education.

It could be used for education, but it can be, really be… It’s just their money to use for whatever at that point.

Tim Tenbrink: Exactly. It can be used for all kinds of things. This could be something to help them for a down payment on a home, maybe a startup capital for a business, um, a multitude of i- of things that could be funded through kind of this, um, vehicle being allowed to appreciate and grow so that when they reach that age of determination, which is, it varies by state.

In Washington State, where our office is, it’s 21. At age 21, then that account becomes fully theirs, is retitled to be a, a brokerage account in their name. Um, but until that time, that’s where owner is the child, is the minor. The custodian, or who’s overseeing that, is then gonna be the, you know, whether it be grandparent, parent, whoever establishes the account, they’re gonna be controlling the investment decisions and, and, uh- distributions, things like that that would come out of the account.

Jason Parker: And that’s where also the, the $19,000 federal annual gift tax exclusion often comes into play or when people talk about it. Because if you give more than $19,000 to any one person, then you have to file a gift tax return. So if your gifts are less than $19,000, um, you don’t have to worry about filing a gift tax return, the kid doesn’t have to file a gift tax return.

It’s just a way to get money. And, and I think a key here, this is especially important for people have higher estates because they’re sa- a higher net worth because they’re saying, “Look, I’m not gonna use all this money. I can get some of the money out of my estate now, start funding the money for the grandkids.”

It becomes theirs at a predetermined age, and it’s just a very simple structure without having to get very complex trusts involved. Very simple way to start saving money for the next generation.

Tim Tenbrink: Exactly. From a, a completed transfer standpoint, you can contribute that 19,000. If you’re a couple, you can double that as a, as a joint gift, 38,000.

You can give that annually to, to each individual, and so, you know, that allows you to have that completed transfer. You’ve immediately reduced the value of your estate by that transfer that you’ve made to that UTMA account. And, um, and then it has the ability to grow. I mean, it… And, and here’s the advantage too if you’re thinking long-term.

Let’s say you have a grandchild that’s born and they’re one year of age and you already have a high value estate- You’ve transferred maybe that 19, 38,000 as a couple at age one. Well, if you held that money in your estate for 18 years, now it’s grown. Now your estate’s just gotten bigger. And so, you know, just these are some more complex estate issues.

But, um, by giving that gift and maximizing that annual gift, you’ve allowed that funds to be transferred out of your estate, then it can grow for that minor who’s, who doesn’t have an estate issue to begin with, and, um, just a very practical way to do that.

Jason Parker: Yeah, and I think the other side of, of this too, some people hear $19,000 or 38,000 and that intimidates them, and it doesn’t have to be that much.

I mean- Yeah … it can be a very small, you know, $100, $500, $1,000, whatever- Yeah … whatever fits into your budget, whatever fits into your spending plan. It’s just a way to say, “Hey, look, this next generation’s really important. We want to start getting some money set aside for them. Here’s an effe- effective way to do it without getting a bunch of attorneys involved in, in, in, uh, setting up expensive trusts.”

Tim Tenbrink: Exactly. Instead of saying, “Okay, here’s some cash. Do with it as you see fit,” it’s, “Okay, I’m gonna give you this gift, but I’m gonna help you structure this in a way that’s gonna be better for your long-term future than, you know, just giving it to you to put in your savings account or checking account to spend on whatever you want.”

So trying to help them get on that path of building wealth at a young age versus just giving them cash to spend on whatever they might see fit.

Jason Parker: Yeah. One of the things I love about this personally, this idea of setting up a specific account for a specific pur- person for a specific purpose, um, I have an account like this for my daughter, where every, every month my wife and I, we contribute money to it, and it’s for my daughter’s future wedding, for her, for her and her future husband.

So it gives me a reminder to pray for that future husband. You know, to be intentional about saying, “Hey, uh, there’s a, a guy that the Lord has picked out for my daughter, and I just want to be, uh, preparing for this wedding in the future, and I want to be, you know, just praying for this individual that’s gonna be joining our family at some future point.”

Now, we don’t do that through the UTMA tool. We just have a regular brokerage account set up for this. But just that intentionality of, of knowing that there’s a specific person that this money’s tied to, it really changes the way that you think about it.

Tim Tenbrink: Yeah, exactly.

Jason Parker: Okay, so what, what do we want to talk about next?

Tim Tenbrink: Yeah, I think we can talk next about a 529 plan, and people are probably familiar with these. Primary focus of a 529 plan is to fund education. I mean, this is gonna allow you to, um, take tax-free distributions from a 529 for qualified educational expenses. And so maybe there’s some grandparents out there just had a grandchild born and they’re thinking, “Okay, we’ve got the assets.

We wanna set this child up so that when they get college age, that college is gonna be fully funded.” And so, you know, two, two ways that you can do that is you can wait until they’re in college, and maybe now you’ve got a, um, a, a child that’s in college and you wanna help. You can give directly as a gift to that university when we talk about the $19,000 annual limit.

That goes away if you give money directly to, uh, an institution. So if they’re in a university, you can pay for their tuition directly, and then that go- that can exceed that $19,000 a year limit.

Jason Parker: Mm-hmm.

Tim Tenbrink: But let’s say you’ve got younger grandchildren that you’re thinking, “Okay, I’m thinking long-term. Rather than wait until they’re in college, I wanna get funding started now that that money can grow tax-free to use for that purpose.”

And so that’s where the 529 plan comes in. And, um, a lot of different Um, areas fall under the umbrella of that, ’cause 529s can fund obviously tuition and, um, fees that are associated with, um, technical fees, all of those things that we- associated with taking classes, but then also room and board, uh, books, supplies, technology, uh, laptops that they need for, uh, for doing their coursework.

All of that can be funded from a 529 plan, so you’re kinda setting them up. Uh, we all know college is expensive nowadays. Yeah. And, um, how to fund college is a big question that, you know, young people are having as they’re approaching that age. And so here’s something where grandparents can, can be a blessing and set them up and say, “Hey, we’ve, we’ve set this up for you.

We wanna make sure that you can get an education. And rather than having thousands of dollars of student debt that you’re finishing with, we’re thinking ahead so that you can have that opportunity without having to, uh, get yourself in heavy debt at the beginning of your adulthood,” that type of thing. So 529 plan is a great way to do that.

Um-

Jason Parker: And one of the things we like to do is to, um, project out into the future what we think. You know, we m- we look at what the current cost of tuition is, then we can project out into the future and say, “Okay, with inflation, here’s the future cost of that education.” Let’s say they want a four-year education and the parents wanna pay for all of it, then we can say, “Well,” we just back into that number and say, “If you want to pay for all of the college education, here’s the dollar amount that you’re gonna need to set aside every month until they’re 18 and they’re heading off to school.”

Or a lot of parents say, “You know, I, I wanna help them, but I don’t wanna … I want them to have some skin in the game, so maybe we’ll pay for two years of school, and then the kids have to figure out how to pay for the other two years,” because people tend to value things more when they have … when they’re participating in the cost associated with it.

Tim Tenbrink: Yeah. As financial planners, um, under that umbrella of education planning, that’s where, you know, doing a, a needs analysis and saying, “Okay, what’s the goal?” Instead of waiting until, you know, maybe your teenager… I, I know you’ve got a, a couple kids. You’ve got a son in college and another one a- about ready to go to college.

Instead of waiting until they’re 16 and saying, “Oh no, how are we gonna pay for college?” You know, we can start early so that that way you can systematically be going in that direction to say, “What’s the need gonna be? How do we achieve that goal?” And then that’s just a matter of, okay, it’s gonna take monthly annual distri- contributions to these accounts so that we can achieve that goal when they’re ready for college.

Jason Parker: Yeah, you’re right, Tim. I do have one that’s almost done with college now, and the- another one that’s just about to start. In just a few days we’re gonna be taking her off to college. And we did set up 529 plans for both of our kids when they were born, and I have to tell you, it is so nice to know that there’s just this pot of money that’s set aside for this specific purpose, and it creates no financial stress for my wife and I because that- we’ve already done the planning in advance.

And- Yeah … one of the things I love about the 529 plan that we used, and I don’t wanna promote any specific company here, but, um, we told the grandparents, we said, “Look, you know, our kids… We live in a world of abundance right now. Our kids, really, they have so much, and more toys at Christmas or birthdays is just overwhelming.”

I mean, sometimes you go to the birthday parties and there’s just so many gifts. And of course it’s fun to give the kids something fun that they really enjoy and they, they can play with. But I would always encourage our parents to say, my parents to say, “Hey, you know, maybe get them something small for their birthday or Christmas, but make the bulk of your giving to the kids into their 529 plan.”

And the company that we use, they actually track who made gifts so that the kids, as they head off to school, they can see, oh, you know, Grandma and Grandpa contributed this much, Mom and Dad contributed this much. And it’s just a cool way to help, um, help the kids know that the family was involved in funding their education.

We believe education is important, and we want them to have the best in life, and we think that one of the things that you never, people never take away from you is your education. You can lose your job, you can lose your business, you can lose your wealth. They can never take away your education. And so we, we invest in that, in, in, into the next generation.

Tim Tenbrink: Yeah, that’s really good, Jason. One of the very practical things, um, conversations we have with, with clients that, that are looking to set up 529 plans is the decision about does the grandparent, if, if that’s… You know, in, in our case with many of our clients, they are grandparents, that they’re thinking, “Okay, we want to set this up for a grandchild.”

Conversing with them about, “Okay, do you want to be the owner of this account?” When we look at a 529 plan, you’ve got an owner and you’ve got a beneficiary. Beneficiary would be the future student, the, the minor currently that’s looking at future college expense. The owner then has the responsibility for investment decisions, future distribution.

Um, just ’cause a minor is a beneficiary doesn’t mean they’re gonna be able to just take withdrawals out- At will from this account, you’re then in charge of those decisions. And so, um, we do have some clients that would say, “Okay, maybe my, my child, their, their parent’s already got a 529,” and like you mentioned, they’re gonna make contributions to that.

Certainly can do that. Or maybe there’s not a 529 plan and the grandparent’s saying, “I’m gonna start this, I’m gonna be the owner of it.” And s- and we give wisdom or, you know, advice in terms of, “Okay, here are some investment options. What’s the time horizon? Let’s help you get that invested in a way that makes sense of when these funds are gonna be distributed.”

But practically speaking, that’s a decision that we work through with clients is, okay, do you wanna be the owner, or are we just gonna move these assets and have maybe, you know, their parent be the owner-

Jason Parker: Yeah. And

Tim Tenbrink: the- … and, and setting that account up.

Jason Parker: For my wife and I, that’s what we did. We were the owners of the accounts.

Our kids are the beneficiaries. One of the nice things about setting it up that way, too, is as long as it’s a family member is the current beneficiary, you can change beneficiaries in the future. Yes. So if you over-save in the 529 plan, um, and you have two kids, you could change the beneficiary to the second child or maybe even to future grandchildren if the, if your own children don’t end up using all the 529 man- plan, uh, money.

So it creates a lot of flexibility, but the key is, um, knowing that i- investing in their education is important, and it’s something that a lot of grandparents want to do. And- Yep … a 529 plan is a really great tool because I, I don’t know if you touched on this, but it’s, it’s money that grows tax-deferred, and as long as it comes out of the account, it’s gonna be tax-free, uh, as long as you use for qualified education.

Tim Tenbrink: Exactly. As long as it meets one of those criteria for being a qualified education expense, you know, a child at age one, maybe you fund $5,000 into that 529 plan. By the time they’re in college, maybe that’s grown to $20,000. That, that $19,000 of appreciation, as long as it’s used for those education expenses, is tax-free.

And so a great opportunity there to, to just see appreciation and maximize those dollars that can be used for that expense of education.

Jason Parker: Now, of course, there can be, depending on the state you live in, some benefits from a tax standpoint, state income tax standpoint. The other thing that I think is pretty cool is that special 529 rule that allows you to front-load five years of annual exclusions.

So $95,000 per donor. For a married couple, $190,000. So for higher net worth grandparents or parents, they may wanna put a bunch of money into that 529 plan just to get … kickstart it right from the get-go.

Tim Tenbrink: Exactly, you know, especially those who, like we said, maybe have a higher estate that are looking to reduce that, that can be a great opportunity to super fund the account from the get-go and then, um, and, and really have an opportunity to see those funds again grow over the childhood of the, of the future student that’s gonna be utilizing these funds.

Jason Parker: Yeah. Awesome.

Tim Tenbrink: Yeah. Okay, so- I think before- Oh, yeah … before we move on from 529 plans, I do think we gotta talk about this really cool provision that’s part of the SECURE Act 2.0, and that is, what they recently approved is now you can actually roll funds over from a 529 plan to a Roth IRA, which is a really cool provision.

Let’s say you funded a 529 plan and, you know, the beneficiary, they’re not gonna use all of those funds for college or maybe they decide not to go to college. Well, there’s this new provision in the SECURE 2.0 Act that says a lifetime amount of 35,000 can, can be rolled over from that 529 plan to a Roth IRA.

And so that’s really neat because not only have you got that tax-free growth, now it can be transitioned to a Roth account and get them started in an account that can grow tax-free for the rest of their life. And so that, that lifetime limit of 35,000, the time that this would matter is once that beneficiary is starting to get some earned income.

It’s gonna have to be done in chunks as they have earned income. There’s that annual limit, um, that is, is gonna be the Roth contribution limit. That’s what you’re restricted to to be able to roll over on an annual basis. But, you know, in a matter of maybe their first five years of working, you could maximize that lifetime limit.

So really cool provision that’s available now with those 529 plans.

Jason Parker: Yeah, you’re right. That… it just makes it so much more flexible. If you over save in the 529, of course changing beneficiary to another family member could be one strategy. But when the kids enter the workforce, you wanna help them start saving for retirement, they still got money left over in the 529, now we’re using the 529 money to fund the Roth IRA for a couple years until we get to that 35,000.

That’s, that’s an awesome, awesome, uh, new rule that just makes the 529 that much more powerful. We love Roth IRAs. I know we’re… I don’t think we’re gonna be talking about Roth conversions nes- next, necessarily today, but we are gonna be talking about some Roth accounts. Um, do you… are you ready to switch to the next account type?

Tim Tenbrink: Yeah, absolutely. So that takes us to the next account type, which would be a custodial Roth IRA And the main difference with the custodial Roth IRA versus a, a regular Roth IRA is just this is for a minor. So you can’t be the owner of a Roth IRA until you turn 18. But a minor can open with a custodial parent or custodial grandparent, it’s not limited to a parent necessarily, um, this custodial Roth IRA.

And, you know, we’ve talked, you’ve talked on the podcast, many, many of our clients would know the power of a Roth, that, that, that money once invested in there can grow tax-free, um, as long as it’s held to that 59 and a half or for qualified distributions can come out tax-free. And so that is just a really powerful tool.

And so the custodial Roth allows, you know, maybe a minor that’s just starting out work to get started investing, starting to save for retirement in a way that’s gonna be very tax efficient. You know, I’ve been having this conversation. My, my oldest is just turned 16, is gonna be starting a job and, um, you know, we’ve talked about, okay, how do you get a start investing?

I, I’ve got some accounts that have a little bit in there for them that, um, you know, I would be looking at, but this is his money. He’s looking, okay, where do I start becoming an investor? And so right away I’ve talked to him about, you know, we can open up a Roth IRA for you. And one thing that I am excited about to just encourage him is the idea of, of maybe doing a match.

You know, this isn’t required, but something that maybe a grandparent could look at and say, “Okay, you’ve got a job now. How about we open up this Roth IRA? If you put $500 in this, how about I’ll match that $500 and get it in this account?” Mm. Love that. Just, just helping them get, get in- started in investing.

I was thinking about it as I was making a budget with my son who, uh, he said, “You know, okay, I think if I work this many hours and I’ve got these responsibilities, maybe I can save $1,000 into, to a Roth account.” And, um, you know, if I could match that $1,000 that he puts in and give a gift of 1,000, I was just looking at the math of how that works.

If he a- if that averaged 6% for the next 44 years until he was age 60, that $1,000 turns into $20,000.

Jason Parker: That’s so

Tim Tenbrink: cool. So, so just the power of compounding, not only does it encourage him to say, “Okay, um, let’s help you get started.” He’s got skin in the game. He’s putting money in, but now I’m helping him along the way with a small gift, something that maybe is within my means to do.

But the effect over his next 44 years or maybe longer till he’s looking at retirement would be huge. And so, um, I think that’s a very practical way to kind of incentivize you know, a gran- a grandchild or even a parent if you’re listening to the podc- podcast and your, your children are still maybe teenagers to help them get going as they maybe get that first summer job, or maybe even they’re, you know, younger and they’ve got a lawn mowing business.

As soon as they have earned income, then this custodial Roth IRA becomes an option. And so if they’re a W-2 employee, if they’re getting a 1099, um, just maybe doing a little part-time work, or like I said, if they’ve got a lawn business, if they’re babysitting and, um, people are paying them, then they can, uh, they can get started with this custodial Roth.

Jason Parker: The power of the Roth is that you get the money in those accounts, it’s gonna grow tax-free, and then qualified distributions from that account are gonna be tax-free. Now, this is probably something you don’t want to tell the kids and the grandkids Yeah,

Tim Tenbrink: yeah …

Jason Parker: if you’re helping to fund it. But the thing you don’t want to tell them is that any regular contributions can be withdrawn at any time, at any age, tax and penalty-free.

The contributions can be. Yeah. So let’s say you, you know, uh, while they were working, they were 15, 16, they started working, you were helping them max out their Roth IRA every year. You put $30,000 into this account. It grew to 50,000. The Roth, um, ordering rules allow them to take that $30,000 out. So they… It’s money that they could access.

Now, we don’t want them to think of it that way because we want them to let that money just sit there and compound and grow and continue adding to it until they’re 58, 59, 60 years old and ready to retire, and they’ve got this big pot of tax-free money available to them. But it is somewhat of an emergency fu- fund for them if they had to.

They’re out on their own, and they need some money to be able to access. It’s a way they could technically access it without tax or penalty.

Tim Tenbrink: Yeah, exactly. You know, there’s a, there’s an annual limit to the Roth, and because you do have that opportunity to pull that money out, let’s say if you were like, okay, gonna buy your first house or something like that, that money would be available in terms of the contributions to pull out if need be.

Um, and so th- there is, you know, to talk about flexibility, we don’t just wanna think about it as this money’s locked up till 59 and a half. Best case scenario is that it stays there until you’re 59 and a half. But in a pinch, you know, that’s certainly something that those funds could be utilized, so.

Jason Parker: There’s a website that I’ll include in the show notes, investor.gov, and they have a compound interest calculator. And I was invited to my kid’s school, um, to go in and speak to their financial algebra class, and I shared this calculator with them, and kids that have never seen or understood the power of compounding, and I mean, I…

My son was so excited. He was showing all of his friends, “Look at how much money we’re gonna have in the future if we just start early.” I… You know, that’s the key to compounding is time, and you can never make that up, and that’s why we’re always encouraging people, we gotta start this earlier. If you start helping kids early, uh, just the amount of time that that money can compound and grow for them, one of the reasons Warren B- Buffett’s as wealthy as he is, is he’s just lived a long time.

The money’s just been able to- Yeah … continue to compound and grow for him. So, um, but I’ll include that link in the show notes so that parents can share that with their… if they have teenage grandkids that really, um, the idea of compounding, Albert Einstein called it the eighth wonder of the world for a reason.

Tim Tenbrink: Yeah, exactly. And to go back to the mantra that we started with, we don’t wanna just give them the money, we wanna give them the wisdom that’s gonna allow them to see that money continue to grow, the wisdom that you had that allowed you to be able to give that gift to them, and that’s, that’s something we wanna transfer along with the financial gift.

That’s so huge.

Jason Parker: So huge. All right, you ready to transfer to the next account that we wanna talk about?

Tim Tenbrink: Yeah. So we’ve talked about, um, education and kind of what’s the optimal tool there. We talked about an UTMA and an UGMA account, and we talked about one of the provisions is you’ve got that age of limitations.

Eventually, that, that account’s their account. Um, there’s no more custodial control over that. When we talk about a custodial Roth, same thing, that age of limitation applies. Um, they’re gonna become the individual owner of that account at some point. So then the question becomes, okay, what if maybe, especially for those with a larger estate that are thinking, “Okay, I’m going to gift a, a large chunk of money, um, but I don’t wanna just when they reach 18 or 21 have them just blow this money.

So what can I do so that there’s maybe some more controls that this money is, is gonna be spent in a way that won’t allow them to just blow it?” And that’s where we’re talking about some more complex instruments and, and some trust interments- instruments would be the ideal there, where we can do things like put in language that there’s going to be staggered distributions.

At 25, maybe they can withdraw 25% of the principal instead of it becoming completely theirs 100%. Now we can put language in that says, okay, maybe at 25, at these milestones, at college graduation, some, some portion of the money unlocks, and we can instead of just- Giving them, you know, a large sum of money that maybe they’re not prepared to handle, now we can kind of put those provisions in there that’s gonna allow them to be set up.

And so that’s where a, a trust instrument’s gonna come in. I think it’s important thinking about this transferring to minors, um, is, is if you’re using maybe this annual gifting limit and saying, “Okay, I wanna fund this, but I’m gonna be doing this every year” or maybe you’re exceeding that ’cause you’re trying to lower your estate and saying, “I wanna make these transfers,” well, then this is where that, that more formal legal entity is gonna be important with the trust.

And, and maybe setting up some protections as well for the future of, like, potential creditors or people are thinking, “Well, if they– what if my child, grandchild gets married? I don’t want their spouse, if they divorce them, to maybe be able to take all of these assets.” So this is where this type of structure is gonna be important.

And, um, you know, we are not, uh, estate attorneys. We help clients plan for some of these needs and then work together with estate attorneys for titling and, um, investment options and just thinking how of your overall financial plan, how these things would flow at, at different deaths or different events.

So, um, but that’s, that’s kind of an important aspect that we would wanna be thinking about, having some spendthrift pres- provisions. You know, in the future, I, I might, uh… I’ve thought about, you know, maybe we do a podcast or just thinking about what if, you know, you’ve got a child that’s a prodigal. If you’re familiar with the story in the Bible, the prodigal son who wasted his inheritance.

As soon as he got it, he went out and blew it And just thinking about maybe you’re a grandparent or parent that’s thinking about, “Okay, I want to include my child, grandchild, but I’m really not sure that they can be trusted with this money,” here’s where this type of provision is, or this type of instrument’s gonna be important.

How to set them up so that they’re not that wor- you know, bad case scenario of an 18-year-old that just got a bunch of money who doesn’t know how to manage it very well, and what was supposed to maybe be a blessing to them really has not been a blessing. It’s really been more of a detriment. That’s what we don’t wanna see happen, so that, that’s where this can be important.

Jason Parker: Too often people think money equals happiness or contentment, and that is not the case. I mean, it… You don’t have to look very far in this world that we live in today and see people who have a lot of money, especially if you look at, like, Hollywood, and, you know, so many of these, um, young people, they’re just messed up, and they’re not happy.

There, there’s a lot of money around them, but they’re not content. Uh, from a personal standpoint, walking life with a lot of people, I’ve definitely seen situations where an 18-year-old or a 21-year-old all of a sudden has access to a big chunk of money, and the grandparents are like, “Gosh, we gotta get him in to talk to Jason.”

And we’ll have the conversations, and we’ll… I’ll, I’ll try to get them to think, uh, logically about how to put some guardrails, but, uh, I can’t think of a situation, Tim, personally, where when a young person receives a big chunk of money that it’s not all gone in a very short number of years. They just haven’t developed the, the tools to know how to manage that kind of wealth.

I think, I think there’s actually research that shows that people that win the lottery, a lot of times same thing happens to them. There’s this wealth effect where they come into a lot of money, they’ve never had that much, and they just blow it all within a short number of years. And that is where some of these trusts really can come into play to protect people from themselves until they have a little bit of life under them, a little bit of wisdom, a little bit of understanding of stewardship.

And then those, uh, in some cases you’ve got people who have substance issues, or they’re just really not… They’re just not Um, their gift was not w- one that is to be able to steward money well. I mean, there’s just some people out there, they’re just not good with money. And so to be able to build some guardrails around them, some protections around them to protect them from themself, it’s, uh, it can be the right way to go for so- many people.

Tim Tenbrink: Yeah. Some have just not built that money management muscle that they need to be able to be wise with it. And so, um, that- that’s where this is important. I had a good friend of mine when I was in high school. His mom had passed away and he had gotten some life insurance money that was, um… became available when he turned 18.

So we were seniors in high school, he turned 18 and received a couple hundred thousand dollars overnight. First thing he did, he went out and bought a new car, and then he

Jason Parker: started- Was it a Camaro?

Tim Tenbrink: It was not a Camaro. But- Oh, ‘

Jason Parker: cause my- my friend bought the Camaro.

Tim Tenbrink: Yeah, yeah. But then what happened is three months later he didn’t like that car, so he traded it in and bought another new car.

Jason Parker: Oh.

Tim Tenbrink: And, um, and then, you know, within a matter of months he had gotten in trouble at home, and because he had money, he just… he up and left and went and lived with extended family, and it just, it wasn’t good for him. And that’s what we’re looking to do. We’re not trying to be mean. W- I know a lot of folks are listening, they love their grandchildren, they love their children, and they wanna be a blessing to them.

But what we want to avoid is how do we, what we intended to be a blessing not become something that’s a detriment to them?

Jason Parker: Absolutely.

Tim Tenbrink: And, and that’s- that’s where this is- is coming into play.

Jason Parker: That prodigal son, the story of the prodigal son. Boy, it’s timeless, and it just- Yeah … plays out over and over and over again.

And, uh-

Tim Tenbrink: Yeah …

Jason Parker: yeah. And the thing that w- Wow, that’s good.

Tim Tenbrink: Yeah. And f- so for wise stewardship, there’s things that- that we can help and we help clients put into place when they think about, “I don’t wanna hand them a million dollars when we pass away,” or a million, you know, multi-millions of dollars, um, because they just, they- they won’t be wise with it.

And so that’s where we can help. “Okay, let’s have a plan that allows them to be blessed, but not to a point where they’re just not able to make good decisions with that.”

Jason Parker: Another area that we wanna talk about just briefly is the idea of paying medical bills directly to the hospital. And so you have a young grandchild.

They, um, they are… Maybe your first great-grandchild is on the way, and so they’re not established in life. You know, it’s hard when you’re 22, 23, 25 years old and that first grandbaby’s coming along, uh, or that first baby’s coming along, and, um, even if people have h- health insurance, there can still be a lot of expense associated.

So, um, we talked about the ability to pay tuition directly to the college as one way to get money out of your estate, reduce your estate, but there’s also this opportunity for medical bills. Do you wanna take a minute and just summarize that or talk about that?

Tim Tenbrink: Yeah. Well, that’s just a key provision. When we think about how to, to maximize and utilize that annual gifting limit, um, here’s a way where if there’s a need and, and you feel, um, led to meet that need, you can give beyond that, that annual exclusion amount and, and pay directly to the medical care, care provider to, uh, take care of maybe that, that surgery that had to be done or an emergency visit.

You know, lots of different cases where maybe you’ve got someone that, um, in your family or someone else that is face these medical needs, you can step in and, and help with that. From a, a transfer from a gift standpoint, that’s where you’re able to do so beyond that just annual gifting limit, and it, it really unlocks the ability to give a bigger sum without having to file any paperwork, that type of thing.

So education is that way. You’ve got to give directly to kind of bypass the individual, give directly to the university. That’s the key provision here. Um, in this case, paying directly to the hospital or the doctor to cover those needs. It allows you to do that and maybe be a blessing in a way, um, that is, that is efficient in using the, the tax code to your advantage.

Jason Parker: And one of the things, you know, we’ve been talking about blessing the next generation, and also in some of these, uh, scenarios, there are tax benefits that come along for the ride. We always tell people taxes are like the cherry on top, but it’s not the primary motivator. Like, we never let the tax tail wag the dog.

I see people get… They get themselves into all kinds of trouble because they make everything about taxes, and taxes should be something that complements a good plan, complements a good investment strategy, but it’s not our primary motivator. Uh, I think it’s when, when you really try to reduce taxes and that becomes the most important thing to you, um, it can just cause you to go down some paths that get, get people onto tools or planning strategies that, um, optimize for taxes, but they leave out the planning and the investments and everything else that goes into this.

So we don’t want people to make decisions solely based on taxes. It should just be something that comes along that’s a benefit to them.

Tim Tenbrink: Yeah, exactly. You want to have a good plan that does incorporate taxes, but first starts with the goals that you have in mind, and then it’s how can we accomplish that from a tax efficient way?

We’re not… The goal is not to just reduce taxes. The goal is to help you accomplish your goals. How can we do that in the best tax efficient way to, uh, get you to where you want to go?

Jason Parker: Well, Tim, this has been a lot of fun. We talked a lot. I mean, this has been a long podcast, and there’s a lot of great information in here.

Any final thoughts for our listeners before we finish up today?

Tim Tenbrink: Yeah, I just hope that, um, you know, there’s a lot of vehicles out there that we’ve touched on some. I hope that this will give some folks just ideas of not only practically speaking how they can transfer, but then how can they be training up their grandchildren or, or other folks that are in their lives to be wise investors, to be wise stewards of the resources.

And just using what… You know, if they’re listening to the podcast, they’re trying to gain wisdom, so we’d encourage them, okay, take the message and, and train somebody else with it. And, um, hopefully we’ve given some good tools that will be, um, effective at doing that.

Jason Parker: Yeah. That’s great. Thanks, Tim.

Tim Tenbrink: Thank you, Jason.

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Investing involves risk. Jason Parker is the president of Parker Financial, LLC, an independent fee-based wealth management firm, located at 9230 Bayshore Drive Northwest Suite 201, Silverdale, Washington. For additional information, call 360-337-2701 or visit us online at soundretirementplanning.com.

479 Beyond the Birthday Gift: Smart Ways to Build Generational Wealth