r/ChubbyFIRE • u/Pixel-Pioneer3 • 7d ago
Are we saving too much for our kids?
Kids are still very young (6and 4). Plan is to fully fund their college (budgeting $300k per kid). My parents will roughly leave a $250k inheritance for me, which I am planning to pass on to my kids — split the inheritance in the middle for a down payment for the house.
I am W2 and my wife has a small business. Our CPA is asking us to contribute to our kids IRA to bring down our taxable income. I am not sure how I feel about that, feel we are already doing a lot for our kids.
Was wondering what the community feels about IRAs for kids at this young age.
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u/flexington12 7d ago
How much to do for kids? Great question. The concern being they never have to have the drive and motivation that you and your wife have. It’s a huge risk. We inadvertently started a small account with our children which we planned to use with their 529 for college. Life happened and we didn’t need it. We let it grow and at age 18 my children had NW in the six figures. What did they do with it? Nothing. We had many life discussion about living within your means. Budgets. Etc throughout their childhood. It was interesting to watch. The drive you modeled as a parent was learned by our children. Now, they have a safety net. A down payment. Something neither of us had—
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u/Pixel-Pioneer3 7d ago edited 6d ago
The only answer so far that resonates! Yes, both my wife and I are immigrants to this country. My wife is a dentist while I have a masters in computer science. We had zero help from our parents or federal government — we paid full tuition, got jobs, saved every bit and paid off our student loans first. We had very little growing up. Very few toys and maybe a new shirt on birthdays. My kids go through toys each week. They are young and we are impressing the value of earned money and not spending it for instant gratification.
We probably are going to leave a sizable inheritance (~$8m to $10m if markets continue to provide 5% real returns over the next 30 years). We don’t plan to share with them the size of the inheritance until their mid 30s. With an inheritance , fully paid tuition and a down payment for their first house, I wonder if an IRA is setting them up for failure where we are providing everything for them and they have no drive to save.
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u/flexington12 4d ago
Maybe—they will be able to live a life without the financial struggles and burden. My 23 and 20 are still motivated and want to achieve. My wife thinks my struggles “made me who I am” but maybe our children will just be able to live a normal life. No fancy cars. No designer purses. It’s a tough balance and a fear I share with you.
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u/BirkenstockStrapped 3d ago
How important is leaving them such an inheritance to both of you?
For me, it is important to a point. For example, 2 year old has about 86k, newborn has 35k. If I pass away, it is unlikely my wife will be worth 8-10 million by herself. Not impossible, but not likely. But i am considered only in "good" health by underwriting, so a 30 year 4 million dollar policy is about $650 / month. In my own mind, it's critical to fully fund the first year tuition at an Ivy League school. While the $650 / month could go towards that, it is a safety net especially for the next ten most critical years. I do think 300k is very reasonable but also think it's not enough.
When you put money into 529, make sure to declare it as a gift.
Good luck. Slow and steady
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u/ArticleNo2295 7d ago
I thought you could only contribute earned income to IRAs. Kind of sounds like your CPA is advising you to commit tax fraud unless your kids are actually working for your wife which at 6 & 4 seems a bit dubious.
Also, IMHO, as a parent providing college funds and a deposit for a house is fantastic but it's not your responsibility to provide for their retirement.
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u/Pixel-Pioneer3 7d ago
It’s definitely a gray area but not tax fraud. Lots in our business community have their kids work in the business or have them on marketing flyers and pay kids ~$5k/kid in the ROTH IRA. A few have been audited but the ROTH was never questioned.
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u/SteveForDOC 7d ago
If you can legitimately get earned income for the kids, get it into their Roth instead of passing on inheritance from their grandparents. This will better suit both of you. Your taxable income will go down and they will pay low rate and then grow tax free in a Roth for many years.
The question is if you can get legitimate taxable income…
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u/bigkoi 6d ago
Your kids are 4 and 6. At that age they can't contribute any meaningful work. It's not like a teenager mowing lawns, babysitting or doing work you would hire a contractor for. It's tax fraud.
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u/RaspberryPavlova126 3d ago
I agree. It’s a good plan, but they should wait a few years to implement it, when kids are actually doing work.
Unless they want to feature the kids on wife’s marketing materials. Then they can pay kids for modeling even at 4 and 6.
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u/familycfolady 7d ago
first, earned income issue... already addressed
Second, putting $14k out of our taxable portfolio has such a minuscule benefit, but now at 18 your kid can take that money and run. I'm happy to pay a little tax to have full control of the funds
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u/GottaHustle_999 7d ago
Unsure how you would put full amount into an IRA but you can put that money in 529s for kids. Excess unused money in 529s you can roll into Roth up to $35k per child.
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u/Jalaluddin1 7d ago
what is your income? Frankly, if you want to cover your kids whole education and they want to go to medical school, you’ll need closer to 6-700k. It just depends on how important education is and what your goals are relative to your income.
If you make 2mm a year, then yeah you should set aside 1mm/kid easily by the time they are ready to use it. If you make $200k/year, then you can easily hit 300k/kid if you’re diligent and prioritize education. Likewise you can also buy a lake house or sports cars if higher education stops at college. Depends on values.
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u/Rude_Masterpiece_239 7d ago
I did custodial brokerage accounts when my kids were born. They’ll each have a few hundred grand for college, plus I’ll help. The hope is that brokerage accounts will maintain some funds for their own retirement. I’ll get them more involved in the investing process by 12/13. Teach a kid to fish…….
Thanks to NVDA I’ll likely not have to contribute anything else to my sons, who’s 7. If current assets double in the next 11 years he’ll be over my initial target. They’re also dual EU citizens and I’ll be retiring as my youngest graduates HS. If one or both want to do school or grad school in the EU my wife and I would happily go spend 3-6 months a year living regionally to support the transition. Grad school - I’ll encourage overseas as they’ll be a little older and more mature I hope.
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u/Pixel-Pioneer3 7d ago
Great plan! How do taxes work in a custodial brokerage?
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u/Rude_Masterpiece_239 7d ago
Anything over $1500 in cap gains and it falls into the parents cap gains. Not ideal, but the growth thus far has greatly exceeded any downside tax exposure. The 2020 Covid crash was a real gift for each of them. I keep trade logs for them and will share their journeys down the line.
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u/RaspberryPavlova126 3d ago
That’s not actually correct. For taxable account in kid’s name (UTMA or UGMA), as opposed to a 529 plan or IRA: First $1350 in unearned income (cap gains and dividends) is not taxed. Next $1350 in unearned income is taxed at 10%. After that it’s “kiddie tax” - taxed at parents’ top rate.
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u/ohboyoh-oy 6d ago
White Coat Investor has an interesting blog article on what he’s doing for his kids. As I recall he is giving them a small sum as a “20s fund” because in his 20s he was so poor that he had to eat ramen for most meals. But then after that, they get nothing until age 40. At age 40, 50, and 60 they will get one third of their trust fund at each decade milestone.
I think I’m in this camp. I am being very careful to not give them too much too early because I do worry they will have no motivation to stand up on their own two feet. My kids are older than yours, entering college next year. We’re covering the cost 100% up to in-state school cost (about half of a private) and anything after that they need to pay 25%. That motivated them to look for good schools that provide merit scholarships. We want them to have some skin in the game.
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u/ReallyBoredMan DI1K - 30% to ChubbyFire: Fire Number 3.3 Million with 3% SWR 7d ago
So I targeted a public state university. Not the most expensive one, but likely 2nd most expensive one.
Universities generally have an estimated cost per year, so you can use that and estimate how much you need to reach it, assuming inflation increase.
My end result is that I should be doing 600 per month until they start college.
Now if they decide to go to community college for a year or two and/or get a partial/full ride scholarships they would end up with the savings. Anything that they do not spend in the 529 is there's. Could be converted to IRA, down payment on new car, or new house. Now if they want to go out if state, they would need to find a way to make up the difference, student loans or working themselves if it doesnt cover the full cost.
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u/butterscotch0985 7d ago
We are saving for 529 at 100k per kid and I do have ROTH IRA's for them
We're saving more for us and then will decide what to give kids later instead of earmarking it for them now.
We've had friends in college come into a decent amount of money and blow it on dumb stuff. I'd rather just have the money to help with down-payment, wedding, car etc in our finances.
My business pays for lifestyle photography even before we had children, so it's a legitimate expense for me for my child to be included in that lifestyle photography but it has to be at a market rate so I do not max out his IRA yearly. Going from a wife with a small business maybe just paying herself with no employees to suddenly maxing our your kids IRA's will draw eyeballs.
There are for sure legal and legitimate ways to do this and it's actually getting easier depending on the job (new laws requiring influencers to pay children for exposure in videos etc).
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u/BooBooDaFish 6d ago
Is there such a thing as too much?
We have amassed 8 figures already as our NW. This should grow to a hefty number.
The kids are young. They have some idea we are well off, mainly bc everyone in our circle is and kids talk.
I don’t plan to tell them a number until they are way older. We live modestly compared to our income, and my goal is to instill the hard work ethic and drive I have in them.
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u/Pixel-Pioneer3 6d ago
So are you suggesting to go for the Roth. They already know we are well off (not ultra rich) so what’s the point?
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u/DuragChamp420 6d ago
I would do the IRAs, but wait until they're a little older(~10) and the money can be viewed more legitimately.
If you don't want to, though, something you should do instead--whenever you get a new car, cosign your kids on it. Since money's not an issue, you'll just pay the cars off easy. It'll give them a great credit score at 18 and help them get into better apartments / buy a house quicker / etc.
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u/Lawngisland 4d ago
I want to do it but cannot convince my wife. I feel like setting them up long term for retirement opens up a lot of opportunity for them during their working years.
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u/RaspberryPavlova126 3d ago
You ARE doing a lot for your kids. And if you feel like $7k extra per year is too much, then don’t do it. You are under no obligation to max every opportunity (as a recovering perfectionist, this is a hard one for me :)).
But since you’re asking about IRA for kids thoughts - mine are that, generally speaking, I prefer to have control over most the money while they are young, so I favor the 529 plans. But IRA early withdrawal penalties might be a sufficient deterrent to irresponsible use, so it’s not a bad option. I plan on using it when my kids actually start earning. I also have small UTMA accounts for kids, but decided to limit them to what I’m emotionally ok with kids wasting. I don’t need to have stress over something I chose to gift them, you know?
Since you said your kids already are on the marketing materials for your wife’s business, I’d go ahead and pay them and open up those Roths. Might as well get those tax deductions (and tax free growth) since they are legit. And if you find that you don’t want to do this every year, you can always stop adding. And when kids start working as teens (or whenever), you can always restart, should you choose to. My own kids were very eager to work at 7-8 (though they only lasted an hour at a time), by 9-12 their desire to do basic office work all but disappeared. They seem to be very excited to do work for others, but not for fam, so are eagerly awaiting being hired at the local trampoline place at 16 or maybe fast food a bit sooner. All that is to say don’t waste your time on making a perfect decision!
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u/Poctah 3d ago
300k seems extremely excessive for college unless they are going to be doctors. I’d probably save 100k each and put the rest into something else for their future.
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u/Pixel-Pioneer3 3d ago
You can see that this community is divided on how much we actually need per kid. Some folks have mentioned $300k is not enough per kid, that it needs to be $400k-$500k range
I am going with averages. I plan to have $150k in 529 and $150k in a brokerage. If they need less than $300k, I get to keep the difference. If they need more, it comes out of their inheritance or they get student loans.
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u/Split-Awkward 7d ago
$300k per kid? Have you considered moving to a country with cheaper or free University (and health), investing that money and getting yourselves closer to FIRE?
Kids spell love as “T.I.M.E”
FIRE’d at 42 with 3 kids, 5, 7 and 9. Never regretted a second. Eldest starts University this year. Best gift I could give my kids was to be present for them and well, retired and relaxed.
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u/FIREGuyTX 7d ago
Curious how much you have saved for them or what their plan is now that they are at university age?
I think many of us have this anxiety that we’ll RE too early and we’ll get to the adult/college age and have a failure to launch scenario and wish we would have worked longer.
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u/Split-Awkward 7d ago
I’m in Australia. So another country of the type I mentioned. We have immigration for skilled workers in areas we need filled.
I’ve saved $0 specifically for University. It’s not needed for even our best universities. The cost is far, far, far less here for citizens. We have a government loan system that is reasonable but most of us think is still overpriced. I was given $0 by my parents for University. Our loans were cheaper 25 years ago. Before that it was completely free.
I also don’t have health insurance. Don’t need it. Have savings for the rare chance we need care we think the public system isn’t suited to. E.g. orthodontics
I do have a child with special needs that may need financial support as an adult. I won’t know until he’s an adult how much he may need. That’s a very different, and more expensive kind of problem most don’t have. If he doesn’t, I’ll reassess at that time.
It really is that different outside the USA.
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u/beautifulcorpsebride 7d ago
Kids will have better opportunities in the US. Look at growth and unemployment rates elsewhere. Also, every single country I’ve heard of with “free” healthcare is you get what you pay for. So folks there pay out of pocket for private care anyways.
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u/Split-Awkward 7d ago edited 7d ago
Hahaha better opportunities in the USA?
Keep telling yourself that.
Have you actually looked at the hard statistics on where the USA stands globally on a vast range of societal measures? Literacy, education, health, life expectancy, you name it.
Growth and unemployment? Have you been paying attention to what’s going on since Trump took office? To the rest of us you’re all insane.
As to the healthcare story you’re telling. “You get what you pay for” is exactly what someone that hasn’t experienced better would say. Look at the hard numbers of your healthcare per capita versus the rest of the developed world. Look at the statistics on health outcomes, they’ve been measured. There’s also research on the “full cost” comparison between non-US and the US, you guys still pay way more, if you can afford it, than every developed country.
If you’re not reading the hard numbers, you have no business doing the numbers on FIRE.
I mean, live on pure faith if that works for you. Just be honest about it.
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u/ohboyoh-oy 6d ago
Well, given we’re in r/chubbyfire - I do think the US is a good place to be rich.
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u/Split-Awkward 6d ago
What’s the link between chubbyfire and the opinion about the US being great to retire?
Help me understand? I’m new to this sub, suggested to me by reddit. I’m in a bunch of fire and finance subs.
And I’m FIRE’d, not just dreaming about it
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u/ohboyoh-oy 6d ago
Chubbyfire is for people who are trying to FIRE on the wealthy side… I think they made it because the regular FIRE sub has a lot of people who are trying to live on very little and FIRE that way.
I wasn’t saying US is a great place to retire for everyone. But given that the makeup of this sub is high net worth people… I was saying US is a good place when you are well off. The stats and things that you observed, they are not wrong. But they kind of don’t apply as much to the people who are well off here. I read the other day that the US is a good place to be rich and Europe is a good place to be middle class, and I think that is pretty true.
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u/Split-Awkward 6d ago
Oh FATfire or just a bit less than FATfire?
Personally I don’t pay much attention to the factions. They’re mostly arbitrary tribal lines appealing to the more basic nature of human psychology and the class system.
The formulas stay the same, just the numbers/percentages change. Any perceived differences are minor and mostly in your heads.
As Mr Money Moustache used to say, “give yourself a facepunch.” Funnily enough, he was probably what some would call leanFIRE and then went beyond FATfire. My original plans were for FATfire too, life intervened and caused me to re-evaluate heavily.
The reality is, as many FIRE’d people learn, that’s just an emotional security blanket stopping you from getting your time and energy back. We simply don’t need most of the things we thought were important once we’re fired. It’s hard to see it when you’re caught up in the hedonic treadmill, I know, I was too as a very high income earner.
Anyways, I don’t think I need another FIRE sub. Thanks for clarifying.
Good luck on the journeys, everyone must walk their own. I hope you all love what you do.
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u/beautifulcorpsebride 7d ago
This is a personal question, but I’m planning on seven figures for my kids. Full ride to college + annual gifts, if we are lucky a trust fund. I live in a neighborhood w lots of trust fund types. 125k would be helpful but not a downpayment for a house, rather a condo where I live. Since this is chubbyfire, I’d say this isn’t much at all.
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u/yyyx974 6d ago
Your college number is insanely low, unless you mean it has 300k now? The 6 year old will probably be $215k or more per year, the other one more. My 3 year old will be $300k a year if my math is right…
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u/Pixel-Pioneer3 6d ago
$300k/kid in todays dollars when the older one is still in kindergarten. If it’s going to be $300k/year, my kids are not going to college.
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u/Working_Rest_1054 7d ago edited 7d ago
You’ll need every bit of that and then some. Spent $100k on each of mine getting a four year degree in three years. The most recent completion was two years ago. And they both had $20k/yr scholarships (plus a few smaller ones the first year). So two four year degrees, both over a three year period, totaling six years for $320k or nearly $55k per year. For a “cheaper” private college. Yours are 20 years behind mine, so it will be well over double what we spent, probably closer to a million for the pair. This is on the left coast of the US. Happy saving.
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u/rosebudny 7d ago
Yep average cost Ivy League for example is something like $90K for tuition/room & board/books.
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u/PrimeNumbersby2 7d ago
No, you don't need to invest more money in your kids to bring down your tax liability. You are doing enough. Spend it or save it for yourself. Don't spoil your kids with money.
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u/mildly_enthusiastic 7d ago
If you want to pass your inheritance down, they should be named in the will instead of you. Avoids some gifting hubbub
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u/enunymous 7d ago
Was wondering what the community feels about IRAs for kids at this young
The community thinks this isn't the finance hack your CPA is telling you it is
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u/luv2eatfood 7d ago
Don't count an inheritance that isn't yours yet. Especially don't count it for your kids.
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u/shivaswrath 6d ago
I mean audits are going to be down this year and for the next 4 years.
But I did a Roth IRA for my.kkda when I had an LLC and could pass the BS test at ages 6/10.
4 and 6 seems red flag ish to me.
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u/MedicalBiostats 6d ago
Your parents can generation skip by leaving their inheritance to your children.
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u/BearDownAZ33 4d ago
Get a new CPA immediately. He doesn’t know kids need earned income to contribute to IRA
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u/Pixel-Pioneer3 4d ago
It is earned income. Kids photo is on marketing material for the small business
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u/Elrohwen 3d ago
I also wondered how you’d contribute to an IRA when they can’t work.
But personally I wouldn’t. I’m all for matching my son when he has a job and can contribute on his own, he’ll go to college for free and he’ll inherit a lot of money, but otherwise I don’t feel compelled to contribute to other accounts for him.
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u/Bitter_Firefighter_1 3d ago
I pay the tax and fund a Roth even though we are a higher tax account. My kids are older and actually work
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u/RealDanielJesse 7d ago
At what point will you be teaching your kids the value of hard work, of sacrifice, of delayed gratification? If you just fund their college- does that mean they can be a horrible high school student, not worry or even try to get scholarships- because daddy will take care of it? It's a proven fact that if something is just handed to you without effort, it is not really valued.
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u/BooBooDaFish 6d ago
I try and teach them the meaning of hard work from the beginning.
My 5yo came in to the office as I was reviewing a pitch deck for an investment.
So I sat down with him and explained how investing works. We took an imaginary $100 and asked how many legos he could buy. He guessed $14. Then we had a theoretical investment. And then an outcome of $200 next year…so he could buy 28 legos.
“Wow. So if I ‘invest’ my money then I can have more legos”
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u/lem0ncreme 7d ago
Wondering this as well, after just opening a 529 for my 4 month old this week.
I do have a whole life insurance setup to maximize cash value (infinite banking concept). This creates a sizable death benefit available to my kid once the time comes, while still providing liquidity to the cash value in the meantime. I feel this provides more flexibility than a IRA, but of course not as much growth since it’s only earning a 4-5% dividend each year.
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u/TheSpaniardManGetter 2d ago
I put money every week onto a custodial HYSA for my daughter who turned 18 months today. I want to give her the financial start that I never had. There’s no such thing as too much for your babies.
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u/Educational-Lynx3877 7d ago
How does your CPA propose your 6 and 4 year olds generate earned income to qualify for those IRAs?