Taxlink

Help Your Kids Save for Retirement

Rod Mauszycki
By  Rod Mauszycki , DTN Tax Columnist
(Photo illustration by Barry Falkner)

My oldest son got his first job last year and started putting money into a Roth IRA. I've always preached to my kids the importance of saving at an early age and "paying yourself first." A few months ago, I was listening to a podcast from an economist. He was talking about the younger generation (college age and younger) and how difficult it will be for that group to acquire enough wealth to retire comfortably.

The premise was that because of our current inflationary environment and issues with Social Security (i.e., our kids probably won't collect Social Security if they are financially solvent), if the younger generation wants to retire with income equal to $100,000 in 2024 dollars, it will need approximately $20 million. This, of course, follows the premise that these funds will not be depleted and will grow to keep up with inflation (the 4% rule of thumb).

Being a numbers guy, I did an inflation calculation to double-check these numbers. Rounding the numbers, an 18-year-old will need to draw $500,000 at age 67 and $1 million at age 85 to have a $100,000 income in 2024 dollars. That's if inflation fluctuates between 3 to 4%. So, $20 million might be on the high side, but it's not that far off.

A HELPING HAND

When I heard this, my first reaction was, "What can I do as a parent?" I feel that my kids will face higher tax rates (both federal and state) and various surtaxes, which will make saving for retirement more difficult.

Let's look at a few things a parent can do to help their kids.

As a farmer, you are in a unique situation. You can pay your kids a reasonable, age-appropriate wage. It's a deduction to your farm, and more than likely, your kids won't have to pay tax minus FICA (Social Security) and FUTA (unemployment) on the wages. They can put the wages into a Roth IRA. If you start this at a young age, the Roth IRA will compound and grow over time, giving your kids a significant retirement account.

Many parents wait until later in life to gift money and assets to their kids. This is a flawed thought process. It might be better to gift them money now to put into a Roth IRA or to provide cash-flow so they can max out their Roth 401k. This allows your "gift" to grow tax-free for 30-plus years. Think about this: Gifting $100,000 over a period of 10 years when your kids are young could generate over $3 million in IRA/401(k) wealth. That's likely more money than they would have inherited.

Educate and encourage your kids to invest in assets that can't be taxed by the federal government. If you can use tax dollars to grow wealth, you've won the game. For example, buy farmland. Farmland historically grows at 7%. You can use a 1031 exchange to avoid taxes while continuing to grow your investment. Even when you retire, you can collect rent on the land and avoid taxes since you didn't sell the land.

One popular method farmers use to avoid tax when they sell their farm is the Delaware Statutory Trust (DST). If this tax-deferral vehicle fits your exit strategy, you may want to gift a portion of your farm to your kids and allow them to invest in a DST along with you. A DST can be 1031ed into other DSTs so you can get tax-deferred growth. If your kids are young, rolling DSTs into new DSTs compounds growth and can create significant wealth.

The key for parents: Educate your kids on the need to start saving/investing at a young age, and to accumulate enough wealth to retire comfortably, focus on assets that aren't taxed until sold or distributed.

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-- DTN Tax Columnist Rod Mauszycki, J.D., MBT, is a tax principal with CLA (CliftonLarsonAllen) in Minneapolis, Minnesota.

-- Read Rod's "Ask the Taxman" column at https://www.dtnpf.com/…

-- You may email Rod at taxman@dtn.com

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