Strategies to Use for Kids Savings – Episode 292

There are many demands that are placed on your money. Should saving for your children’s future be one of them? On this episode of the Dentist Money™ Show, Ryan and Matt discuss saving strategies for minors. Some dentists choose to save for their kids, others choose not to. No matter what you decide, you need to know the available options so you can do what’s best for your family.

 

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Podcast Transcript

Ryan Isaac:
Hello, Dentist Money Show listeners and friends. Welcome back to another episode of the Dentist Money Show sponsored completely by Dentist Advisors. Dentist Advisors is a no commission fiduciary full comprehensive dentist only financial planning firms for dentists, for dentists like you all over the country. Check us out at dentistadvisors.com. Today on the show, we’re talking about our kids and specifically how to save for kids’ futures, whether it’s college or house or business, or just for their future retirement. How to do that and what types of accounts, the pros and cons trade offs, all that kind of stuff.

Ryan Isaac:
So, today on the show, Matt and I talk about how to save for your kid’s future. If you have any questions for us after you listen to the episode, please reach out, go to the dentist advisors.com website, click on the book free consultation button and book a chat with one of our very friendly dental specific advisors today. And you can always post a question to us in the dentist advisors discussion group on Facebook. Go there and post a question. We’ll post an answer. Anyway guys, thanks for being with us today. Thanks for downloading us, checking out the show. If you’re new, welcome, we hope you come back and enjoy the show.

Announcer:
Consultant advisor, or conduct your own due diligence when making financial decisions general principles discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisors, a registered investment advisor. This is Dentist Money. Now, here’s your host, Ryan Isaac.

Ryan Isaac:
Welcome To The Dentist Money show where we help dentists make smart financial decisions and avoid the bad ones along the way. I am Ryan Isaac. And I’m here, my pleasure of course, to be here with Matt, the Hollywood mountain Mulcok. What’s happening, Matt. [crosstalk 00:01:37].

Matt Mulcock:
No, Ryan. Of course it’s your pleasure because you’re sitting in a sunny California right now, our dream spot.

Ryan Isaac:
This is a vacation podcast recording, episode one.

Matt Mulcock:
Makes me very jealous. I miss that place a lot. Where are you? You’re in San Diego?

Ryan Isaac:
We are in north San Diego county, Solana Beach, coming to you live. A little spot up here that the family enjoys. And it’s mostly a selfish vacation. I’m like, hey family, would you like to rent a condo in the summer right by the place I like to surf every day?

Matt Mulcock:
They’re like, yeah.

Ryan Isaac:
Sure dad. Do we have any other options? No, you don’t.

Matt Mulcock:
You do what my wife does. You pose it as a question, even though it’s not a question.

Ryan Isaac:
It’s not a question. Are there other options’ dad and does California have other places we can stay? Probably not kids. [crosstalk 00:02:26].

Matt Mulcock:
You’re like, no.

Ryan Isaac:
This is it.

Matt Mulcock:
It is not a huge state with millions of places to stay. This is the only place. [crosstalk 00:02:31].

Ryan Isaac:
This is all we got. It’s all California offers. But speaking of kids, this is what we’re going to talk about today. This is a great segue, Matt. You already- [crosstalk 00:02:37].

Matt Mulcock:
Natural segue.

Ryan Isaac:
It’s so natural. You’re so good at podcasting these days. Done this for like … How long have you done this for? When did you jump into the show full-time? Was it a year ago or less than a year?

Matt Mulcock:
I honestly don’t even know it’s been several months. But I couldn’t tell you how many.

Ryan Isaac:
All I remember, it was like a crazy busy time for all of us, and me and Reese, I flew in to do some episodes and reset some like last minute emergency things he had to take care of with the business. And then we’re like, “Matt, can you drive to the studio and jump in on a few?” And that might’ve been last year. I don’t know.

Matt Mulcock:
Yeah. I think it was last year, sometime.

Ryan Isaac:
Well kids let’s talk about the kids. The kids need our help guys and- [crosstalk 00:03:14].

Matt Mulcock:
The kids are the future.

Ryan Isaac:
The kids are the future, as they’ve been saying for generation after generation. But to be honest with you, I don’t know.

Matt Mulcock:
I’m not so sure anymore.

Ryan Isaac:
Hey, I’m not going to do a justice to this joke, but I saw a standup comedian talk about this one time and he’s in his 40s. And he had the audience like kind of cheer clap. He said, “Whoever’s over 35 cheer, clap, whatever.” A bunch of people in the crowd start cheering. He’s like, “Do you guys remember when you were kids and you were all told that you were the future.” And when he said that, he just like dead pan, just like stared at the audience [crosstalk 00:03:49]. Kind was like, let it sink in. [crosstalk 00:03:52] Here we are. And I don’t think we really did much with it.

Ryan Isaac:
But maybe there’s hope for our next generations future. So, that’s we’re going to talk about today. We’re talking about how to save for kids’ futures, things like college, homes, businesses, or just help them out. Getting started with some investment accounts, save for the future. So, that’s a really common question that we get all the time actually. And we just did a webinar on this. So, if you’d like to dive in, I actually had one of our advisors, Cody Murray, the Southern gentleman.

Matt Mulcock:
The Southern gentlemen. Yeah. That’s a way better nickname.

Ryan Isaac:
Yeah. They called it, one of our good friends and clients said that our nicknames together are sir and stilly.

Matt Mulcock:
Oh yeah.

Ryan Isaac:
It’s really good. It’s from Stillwater. So anyway, Cody and I did a webinar. If you want to check that out, go to dentistadvisors.com, click on the education library and under webinars. It’s the one we did in June 2021. And it’s was in front of a live audience, live studio audience. There was no clapping involved, at least that we couldn’t hear. I wish we had that.

Matt Mulcock:
[crosstalk 00:04:57]. We should have a little clap track.

Ryan Isaac:
A little clap and a laugh track. But yeah, we had some good questions, good interactions. A lot of parents in there and good questions about saving for kids. We’re going to cover that today. So, we’re going to walk through kind of steps, I think there’s maybe five in here that we’re going to hit on the process of figuring out how to save for your kid’s future. How to deal with what types of accounts. How to invest the money. How to begin the process of figuring this all out.

Ryan Isaac:
So, before we start that, man, I’m just going to throw it to you for a second and ask you when you get these questions from parents, what’s kind of the vibe or the feeling about saving for kids. What point of people’s careers are they asking this? Or is it all over the place? Are they older parents, younger parents? What are their hopes to do? What are people’s main goals for saving for kids? What do you hear from clients when they ask about this stuff?

Matt Mulcock:
Yeah, it’s a good question. I mean, I’ll be honest. In my experience, it’s really across kind of all over the board. There’s not like one general theme. I literally have some clients are just like, no, I did it on my own. I don’t need to save for them. I’m providing them a life and they’ll figure it out. [crosstalk 00:06:09].

Ryan Isaac:
These kids get food, and clothes, and activities, and geeze vacations. [crosstalk 00:06:15] What else do you want from me, man? I’m trying to save for my own retirement.

Matt Mulcock:
Yeah. I’ve got a two year old and a baby. I’m changing their diapers every day. Like I don’t need to pay for your college. But obviously I’ve got people on that end of the spectrum. And then I’ve got people on the other end, that I literally just had a conversation recently with a client who their goal and they are making it happen, is paying for everything, including post-grad. So, medical school or law school or whatever they choose to do. So, to me, there’s really not a set theme other than what we’re going to talk about today, which is once they’ve decided they want to do it, it’s figuring out the rest of the details.

Ryan Isaac:
Yeah, logistics. Cody and I talked about this on the webinar. It is all over the map. Some people start thinking about this really early, even before they’ve even really had their own cashflow to save for themselves in the future. And I mean, you just can’t even think about it until you’re like mid-career and you even have five bucks leftover every month for the first time.

Matt Mulcock:
Which by the way, if you’re going to pick one or the other pick the second option. And we’ll get into that I’m sure. But I’m curious Ryan, from your perspective, one thing that I’m thinking about to your question, I get this all the time and again I wonder if you do where sometimes I have conversations where it’s just saving in general where they’re thinking, I know I probably should do this. Like I kind of had that tone from people. Or I kind of that vibe from parents sometimes. They’re like, oh, I know, I probably feel like I should save for them. But you can kind of feel like they don’t really have set goals around it or they don’t really necessarily even want to.

Ryan Isaac:
More like a conviction around- [crosstalk 00:07:54].

Matt Mulcock:
Or conviction around. Exactly, exactly.

Ryan Isaac:
Yeah. And everyone’s really different. They kind of moves in phases in saving money in general because you have some people that started the beginning of not even having a conviction that they just shouldn’t spend all the money they make. Just having a conviction like, all right, I guess I should have some money leftover. And then there needs to be conviction about investing it somehow whatever your investment path is going to be. And yeah, so it kind of moves in phases like that.

Ryan Isaac:
I was going to say too, some people are affected by like their upbringing, their family dynamic and culture. You know money is such a interesting thing for all of us. It’s very emotional and carries a lot of baggage with it, from our upbringing and our environment. Sometimes it’s really cultural too. I’ve met people from all over the world who feel differently about this. I’ve met people who will, like their plan is to have basically nothing for themselves. And they’ll hopefully work until they’re like late seventies, if possible.

Matt Mulcock:
And then their kids take care of them. I’ve had conversations with people that come from different cultures and it’s kind of unexpected. That’s just a kind of an expected cultural norm they’ve done for generations. Like I take care of my kids, they take care of me at a certain point. Once I’m no longer to take care of myself, it is very much embedded in their culture.

Ryan Isaac:
Yeah. That’s different from different parts of the world too. I’ve experienced that where taking care of your elderly parents or grandparents, even having them live with you is a very normal common practice. And so you kind of just like pass along. All right. Well, yeah. So, I guess we’re just saying that if you’re listening to this and you’re wondering should you save your kids? Should you not? Is a really personal thing. And it there’s no norm or standard, some do some don’t, some do a little bit.

Matt Mulcock:
And don’t feel guilty one way or the other. I think that’s the biggest thing I want to get across to people. And the first thing we’re going to talk about I know is getting more specific around goals and how much and things like that. There is no right or wrong way to do this. So, a lot of times people will come to me and be like, okay, I want to save for my kids, how much should I save? I’m like, I don’t know. I can’t answer that. You need to answer that.

Ryan Isaac:
Yeah. Well, let’s start there. So, here’s the logistics, we’ll go through probably five different points here. Point number one is we’ve got to figure out how much you were going to do. Like you’re just saying, we can’t really tell someone how much they should, because one person is going to feel like sacrificing their own future for their kids. And another person is going to say, no, I’m going to put on my own oxygen mask first. And then if there’s any leftover, I’ll give to the kids.

Matt Mulcock:
Yeah, of course.

Ryan Isaac:
But they say it on the planes for a reason, put on your own oxygen mask first, it’s going to be hard to help other people if you haven’t helped yourself a little bit. At least establish something. Maybe that’s a selfish way to look at life. I don’t know.

Matt Mulcock:
Yeah. But I will say … No, if someone just said, generally speaking again, remove cultural norms and remove personalized- [crosstalk 00:10:44].

Ryan Isaac:
I would say that.

Matt Mulcock:
Yeah. Remove the nuance. If you’re just saying general rule of thumb, that’s the approach I would take, is take care of yourself first. You have to, right? It’s the same reason why, if you’re going to order your personal goals in any order, it’s generally in my opinion, needs to be health first, then family, then after that, or whatever comes after that. Because if you’re not taking care of yourself, you can’t really take care of your kids or anyone else around.

Ryan Isaac:
And there’s no institution that will lend you money for your retirement later. But there’s plenty of institutions that will lend money to your kids for college and houses and businesses.

Matt Mulcock:
There’s plenty of other options for them. Yep.

Ryan Isaac:
Dang kids. All right. [crosstalk 00:11:22]. So, number one is we’ve got to figure out how much. Feedback we can provide as advisors though, is we can help you establish a healthy baseline savings rate for yourself. So, if you agree with that and you’re like, yeah, I want to make sure my future is secure first. And then whatever’s left over as I grow my income or my profitability, whatever. Then I’ll save for my kids on top of that. Then we, as advisors can help you establish a healthy baseline savings rate that’s based on your income, your spending, some of your goals, your timeframe. There’s a lot that goes into making sure someone’s savings rate is appropriate for them. For one person it might be 15% for another person that might be 30. But that’s what we can do as an advisor. I mean, that’s what we do for clients.

Ryan Isaac:
It’s hard to just say generally for somebody. For a client who we know very, very well, we know their situation, we gather and collect and track data and analyze data for them throughout the years, and talk a lot to them. We can do that. And so we can say, hey for you, 22% savings rate is going to put you on track to being done working at 60, with enough money to keep living the way you’re living, without having to worry about it. And you might even have money leftover to pass along to kids after that, like it’s very secure retirement. So, anything on top of 22% savings rate, you can give to the kids or you can pay down debt with, or you can spend more, or to save, or like whatever. So, that’s where we can begin. But you’re right, Matt, we can’t just tell someone how much you should save for your kids because it’s very different for everybody.

Matt Mulcock:
Yeah. The other part of this too, is if they come to us and they’re specific. That’s what I tell people is if you say you want to save for your kids, we need to, just like for your retirement, we have to start from the beginning and we have to get really specific about what you want. There’s a massive difference. Let’s say education is your number one priority. That’s usually really common. Someone wants to save for their kids’ education. Okay. Well, there’s a big difference in a state public school versus you want to save if they get into anywhere across the country. There’s a huge, huge … Or you’re saying you’re hell bent on them going to an Ivy league. So, we have to get specific on things like timeframe. That’s pretty straight forward. We have to get specific on things like, well, what is this specific goal for again, in this case, let’s talk about school. Great. Are you again, what type of school are you talking about? Once we get specific, then we can start planning.

Ryan Isaac:
Yeah. So, step one, we’ve got to come up with an amount. We can help a little bit establish a baseline for yourself, but you as a parent are going to have to come up with the amount that you’re comfortable with giving for your kids. And like you’re saying, there’s a few factors to do that. Step two is we have to figure out if these kids are going to be on payroll or not. That is pleased for sure a CPA question. Okay. So, talk to your CPA about putting any family members on payroll, including spouse or kids, whatever. But talk to your CPA about putting kids on payroll. If they’re on payroll, in step three, we’re going to talk about the different types of accounts you can have for kids, but it unlocks some different options if your kids are on payroll.

Ryan Isaac:
And look, if you’re going to give, say 10 grand away every year to your kids, anyway, it would be nice. There are trade offs, there’s pros and cons, but it would be nice if that 10 grand that you’re going to give your kids or whatever the number is, is tax deductible through your business. You pay them like an employee. Okay. So, let’s pause there for a minute. Anything you want to say, Matt, about your experience in having kids on payroll? What CPAs tend to think about that? Any like warnings you’d give anyone or anything like that?

Matt Mulcock:
Yeah, I would say that it depends on the CPA. I’ve had tons of conversations with CPAs. Some CPAs are all for it. They fully believe in it. They’re like, this is a no brainer

Ryan Isaac:
And they’ll get on payroll at two years old.

Matt Mulcock:
I literally have clients who have infants on payroll, because they’ve taken a picture of them, they put them on the website, they’re a model and they’re on payroll.

Ryan Isaac:
This is not tax advice people.

Matt Mulcock:
Not tax advice.

Ryan Isaac:
We’re just relating a story.

Matt Mulcock:
Yep. Yeah. So, it just depends. I’ve talked to other CPAs that are super, super conservative that are saying, no, I won’t do that until they’re a certain age. And they’re actually working in the [inaudible 00:15:29] they’re actually be able to justify that income. So, it totally depends. It’s across the board on whether or not your CPA is on board. Obviously anything like this there’s, I think any CPA is going to tell you, like, does it possibly get you into a situation where you have a higher risk of audit? Sure. I think that’s probably possible. But again, I talked to many CPAs that are like, no, this is so well-documented now that it’s just done across the board. Again, not tax advice. It depends on the opinion of the CPA.

Ryan Isaac:
Just talk to your CPA. It is very common and it does depend on the CPA. Let’s talk about types of accounts. It’d be step three. Once you’ve decided if your kid is on payroll or not, then we can talk about the types of accounts. Just generally speaking, though, there are two ways you can have accounts for your kid’s future. One way is to have it in your name as the parent. We’ll talk about the pros and cons of that. And the other way is to have it in the name of the child. And we’ll talk about the pros and cons of that. And we’ll talk about the specific types of accounts. But let’s just stick here for a minute. Okay, we’ll jump in the pros and cons right now. Sometimes I’ve met clients who became clients after they’d saved quite a bit of money for their kids. And I’ve met people, you probably have to, Matt, where their child turns 18 or 19, and they all of a sudden get legal custody of the account that was in their name, right?

Matt Mulcock:
Yep.

Ryan Isaac:
We’ll talk about this, but maybe it was a UTMA, a brokerage account or a Roth or something. And now it becomes the child’s actual legal property at age 18. And there’s like quarter million dollars in there. And I’ve met enough parents now that this is part of my advice or at least part of like the discussion, I’ve met enough people who wish they didn’t do that. They’re like, oh, I didn’t really think, I didn’t think I’d actually save this much money for my kid. And I definitely don’t want my 18 year old to have a quarter million dollars. What’s your experience been around that? Have you had those stories too?

Matt Mulcock:
Oh yeah. And more times than not, when I bring up that caveat of like, hey, you can put it in their name and these different types of accounts. But here’s the catch. Once they reach the age of majority, which in some states is 18, most states it’s 18, some states it’s 21. Either way once they hit that age, there is nothing you can do about it. That is their money. And when I worked at fidelity, we had this happen quite a bit, obviously a much larger scale, literally the minor would reach out and be like, this is my money. And they prove that they’re at that age. And like the brokerage firm is required to now move that money to your name. It’s their money. And so a lot of times, most of the time when I bring that up, people don’t like that because they’re thinking, I remember how I was when I was a teen. And if you handed me 250 grand or a hundred grand or 50 grand, I remember what I would do with it when I’m 18. Come on, there’s no way you’re going responsible [crosstalk 00:18:28].

Ryan Isaac:
At 18, I would a had a few more Gibson Les Paul guitars, a few more Marshall fenders or Marshall amps and probably a lot of travel. That’s what I would have done at 18. Yeah. And that’s kind of the downside. It’s funny you say that when I mentioned that caveat, I often have parents backtrack and be like, you know what, I’m just going to keep it in my name. So, let’s talk about the different types of accounts in this theme. So, you can have it the parent’s name or the kid’s name. I’ll just go through a list of basic account types that people can have. Checkings and savings accounts. You can have this in the parent’s name, obviously, and the kid’s name. And I’ve got teenage kids and I’m watching them now learn to have little jobs, someone babysit, and a one turned 16 this year so they’ll start working.

Ryan Isaac:
And I’m watching them making spending decisions. And it’s really funny when they need new pants and it’s outside of the scope of like what we’ve already said we’d buy for the year, for school clothes or whatever, or they need new shoes, or they just want something new. And you’re like, okay, cool. Yeah, go buy yourself some new shoes. And they’re like, well, I only want these Vans or something. And then you go see the Vans are 75 bucks. And then they’re like, well, the target shoes that are 20 that look like Vans, they’re actually pretty cool. I’m like, yeah, it’s funny how that works when you start paying for it.

Matt Mulcock:
Start paying for … You all of a sudden get little bit more prudent. [crosstalk 00:19:51].

Ryan Isaac:
Watch my kids do a little bit of a bargain hunting, or passing on things. When they actually have to take the money to the counter. So, checkings and savings account, I think is totally healthy, my opinion, for kids to have, especially as they start earning money on their own.

Matt Mulcock:
Oh, I think getting those lessons, teaching them those lessons early, as early and often as possible is critical for them to be successful in the future. And like you said, learning the trade-offs of, okay, if I spend $75 on these shoes now, what does that mean I can’t spend that money on later? And having them start to think about that and having those-

Ryan Isaac:
Or think ahead. I like that. Yeah. Think ahead to like, I could just go to target and with spend my money, but we’re going to California for family vacation in three months. Maybe I’d want to shop [crosstalk 00:20:36] there instead. Yeah. Or yeah, totally. Souvenirs or something. So, checking savings account, it can be in a kid’s name, parent’s name. I think it’s great personally, to have it in the kid’s name, so she has some income and get a bit older. Another type of account is a brokerage account in the parent’s name is called a brokerage account. When it’s in a minor’s name, it’s called a UTMA. And I’m going to ask you Matt to tell me what that stands for. I forgot. It like the Uniform Transfers to Minors Act. [crosstalk 00:21:04].

Matt Mulcock:
Yeah.

Ryan Isaac:
It’s a acronym for the actual name of the legislation that allowed a brokerage account to be in a kid’s name.

Matt Mulcock:
I always just call them, another way to call them is just a custodial account.

Ryan Isaac:
Yeah. Custodial account. So, a brokerage account is like a checking account or savings account. It’s after tax money and there’s no tax advantage. There’s no limits. You can put whatever you want in, you can take whatever you want out. But in a brokerage account, you can buy investments in there. So, you can actually grow your money, which you cannot do in a checking or savings account. So, let’s just talk a little bit about pros and cons here. If a parent says, I don’t like the idea of … They choose to use a brokerage account, but they don’t like the idea of the kid having it in their name and they do it in their own name. Then that gives them full control forever to save the money in their own name. And you can have like a separate brokerage account title at like kid’s future savings.

Matt Mulcock:
Yeah. I have some clients [crosstalk 00:21:54].

Ryan Isaac:
You can choose whether or not to use it.

Matt Mulcock:
And I have some clients that just put a bucket that had got three, four or five kids and they just put all of their kids’ money in one bucket.

Ryan Isaac:
And giving it out however they want.

Matt Mulcock:
That’s just for the kids.

Ryan Isaac:
And one kid might get a scholarship and then you can just like, save the money for the next one or save it for like a house down payment or a business loan or something. Or your kids can get into college, you can change your mind. And you’d be like, you know what? I’m keeping that money. Y’all don’t need it.

Matt Mulcock:
You know what? I don’t like you very much. I’m going to go ahead and keep this.

Ryan Isaac:
You’re kind of a punk during your later teenage years. Yeah. So, you can have a brokerage account. The pros and cons. If you choose to put a child on payroll, you can’t take their payroll earnings and then stick it in your brokerage account in your name as a parent. Really.

Matt Mulcock:
Yeah. Yeah.

Ryan Isaac:
So, let’s just say you cannot, technically, you can’t do that. If they earn money in their name, through payroll, it’s got to be, and they’re going to put it in a brokerage account. It’s got to be in their name, which turns to their full legal custody at 18 or 21 in some states. And I’ve thought about this too. Some parents might choose to have a brokerage account in their own name, in the parent’s name, save up a ton of money in there and then gift out chunks of money later on for the kids for various reasons. But that is one of the downsides to keeping it in the parent’s name, there’s a potential of running into some gift tax issues or strategies you’d have to work out with your CPA later down the road. If you just keep a big chunk in your own name and you start divvying out big chunks to your kids in the future. Although the limits are fairly high, [crosstalk 00:23:29].

Matt Mulcock:
Actually it depends on how much you’re giving every year, but they’re pretty high.

Ryan Isaac:
You can go per parent, per kid. Right now you can give basically [crosstalk 00:23:37] between-

Matt Mulcock:
15 grand each.

Ryan Isaac:
Each, two spouses can give 15 grand each to each kid. So, 30 grand per kid per year escapes the gift tax thing and that’ll change it in the future, I’m sure. But anyway, so that’s a potential downside, but that’s the brokerage account. That’s the type you can have. And the advantage of the brokerage accounts I love it. They’re just extremely flexible. So, anything you want you can put in there, you can take any amount out for any reason, there’s no limits, there’s no penalties for taking the money out. You can invest it however you want. It’s super liquid. It’s flexible. I love brokerage accounts for that reason.

Matt Mulcock:
On The Dentist Money Show, we teach dentists how to make smart financial decisions.

Ryan Isaac:
You’re correct.

Matt Mulcock:
I mean, is that all it takes Ryan to make smart financial decisions, listening to our show?

Ryan Isaac:
Matt, it’s a good first step, but to put your financial future on the fast track, the next smart decision is to go to dentistadvisors.com. What you do there is you click on the book free consultation button, right in the middle of the home screen. And then you schedule a time to talk with one of our very friendly dental specific financial advisors today. Let’s move on to a Roth IRA. The Roth IRA is only available to your child if they have earned income. So, if they have a job somewhere else, or they are an employee of your practice, then your child can use a Roth IRA. Matt, what do you think about a Roth IRA? What are your thoughts on it?

Matt Mulcock:
Roth IRA for me is one of my favorite accounts in existence. It has tax benefits of a qualified account. The fact that you can invest in it tax free or have that growth be tax-free as long as you’re meeting the guidelines. And it’s also super flexible. So, the fact that you’re able to get the contributions back out of the account, anytime you want no tax to that. That’s something that has confused a lot for people.

Ryan Isaac:
Yeah. Surprising. It was surprising for me when I learned that, that you can take your … Explain what you’re talking about.

Matt Mulcock:
Yeah. So, when you put money into a qualified account, let’s say in this case, a Roth IRA, you’ve got different buckets of money that within that Roth. They’re invisible buckets, but they are buckets nonetheless. So, the first bucket is your contribution bucket. So, money that you put in to that Roth IRA, it’s in this invisible contribution bucket. You can pull that money back out of that account at any point for-

Ryan Isaac:
For any reason.

Matt Mulcock:
Because … For any reason. And people get really confused by that. And if you think about it like this, the reason why you can do that is because that money is going in after tax. There’s no tax benefit that you’re getting on the front end. The IRS is not giving you a deduction. So [crosstalk 00:26:18].

Ryan Isaac:
For the Roth IRA [inaudible 00:26:19]. Yeah.

Matt Mulcock:
To the Roth IRA specifically. Exactly. So, for the Roth IRA, you get no deduction on the contribution. So, then the IRS is not going to tax you on money that’s already been taxed. I know the IRS is some dirty letter sometimes to people. But they’re still fair in the sense of they’re not going to tax you twice on that money. So, that is something that people get confused that you can get that money back out at any point. So, they’re really flexible in that way. The other flexible things about the minor Roth IRA is, or Roth IRA’s in general is that they’re tax free as long as you’re holding them to a certain point. In this case 59 and a half. However, there are some caveats too.

Matt Mulcock:
There are some exemptions to this. Education, you can use it for higher education and avoid penalties. Medical costs, if there’s any health needs, you can get money out. First time home purchase. So, there’s some things that you can still get, not only the contributions back, but you can actually get growth of that account out without being penalized. So, they’re very flexible. I love … There’s ever opportunities to set up a Roth IRA for kids. If you’re planning on saving for them, it’s probably my number one choice.

Ryan Isaac:
Yeah. I’m glad you went through that. Thanks. I agree. They’re really flexible accounts. And if your child is on payroll or they have their own jobs too, it’s just a great account to set up for them. But the caveat here, not only do they have to be on payroll, but they do have full legal access to that account at age eight 18 or 21 in some states.

Matt Mulcock:
Same thing as the custodial accounts, it’s their money.

Ryan Isaac:
It’s their money.

Matt Mulcock:
Now, one thing I will say to this, and this is something as a parent that I would do, and I’ve heard a lot of clients that do this. You can kind of instill a different mindset in your kid from a young age with the Roth IRA, in basically just telling them this money is not accessible until retirement.

Ryan Isaac:
Yeah. It’s not even college money.

Matt Mulcock:
It’s not even college money. [crosstalk 00:28:20].

Ryan Isaac:
It’s not house money either.

Matt Mulcock:
Not house money. This money is for retirement. And if you instill that in them early and you make it like an off-limits type account, even when it legally becomes theirs, I know of people that have done that and their kids get to a certain age and in their mind they’re just thinking that’s not even my money until retirement. So, it’s a little bit easier than the brokerage account from a mental perspective, from a psychological perspective.

Ryan Isaac:
And if your kids don’t grow up to be financial planners, they’ll never figure it out.

Matt Mulcock:
Exactly. You just tell them it’s not accessible until they reach retirement and then they’ll never figure it out. Exactly right.

Ryan Isaac:
Or they just go Google it. Imagine the kid at like 32 and they’ve always just thought like, man, I wish I could touch this money. It’s 300 grand in there from old paps. And then they Google it … One and they’re like, wait, I can actually get this money. And it’s mine.

Matt Mulcock:
Wait a second.

Ryan Isaac:
Dad, you lied.

Matt Mulcock:
Yeah. But if you run a growth calculator on minor Roth IRA, if you start saving, let’s say your kid’s five and you run the numbers on even a moderate growth rate till they’re 65, you’re literally setting them up with pretty minimal cash outlay, minimal contributions by you, just from the time value of money. We’re talking about a seven figure set up for your kids when they’re retired.

Ryan Isaac:
Everyone’s seen those little graphs where you’re like, if you started saving at age 15, you could stop by age 30. And the person who starts at age 30 would still never catch you.

Matt Mulcock:
Exactly. Yeah. [crosstalk 00:29:48].

Ryan Isaac:
Which is true. It’s painful to see that [crosstalk 00:29:51].

Matt Mulcock:
Yeah, it is painful.

Ryan Isaac:
So, I’m 41 and I’m saving like a madman as much as I possibly can-

Matt Mulcock:
To catch up.

Ryan Isaac:
Still not catching up to that 15 year old. So, Roth IRA is a great account. They got to be on payroll. Let’s talk about 529s. 529s are like state run or sponsored college savings plans. These have become more flexible over the years. And so depending on the state you live in, there are some slight state tax advantages. It could be a credit, could be a write off, depends on your state, check with your CPA, for putting money into these types of accounts.

Ryan Isaac:
They’ve been favored in the past, because they’re easy to set up. They do have some favorable tax growth. Like they’re not being taxed as they grow every year and the money can come out tax free for qualified educational purposes. And like I said, they’ve become a little bit more flexible over the years. The downside of a 529 is just that it’s only for education. So, I’ve met enough people now that have built up 529s that stopped doing it and then switch to a Roth or a brokerage account just for that reason, just because they’re like, I don’t know, what if they don’t need this for education?

Matt Mulcock:
They don’t love the idea of feeling pigeonholed.

Ryan Isaac:
Yeah. Kind of stuck to only use it for education. And then of course you get some advantages or trade-offs to only having it be used for one purpose. And they’ve been helpful for other families who have like grandparents who want to give to kids. They can gift into these 529 plans. And every state’s different, some states have pretty well-respected 529 plans, which means the fees are reasonable, the investment selection is good. The tech or the account access is helpful.

Matt Mulcock:
They are a little bit more flexible, like you said, with some recent legislation that was passed a couple of years ago. So, number one is it used to be that you had to use it for college. You couldn’t use it for anything below college, high school or private schools, below college. Now because they’ve removed another account called Coverdells, they’re gone. They’ve now made 529s completely available for all education. Which to me, I think that actually helps the case a lot more for sure.

Ryan Isaac:
So, we covered all the different types. And let’s just let’s end with this really quick. I mean, we could probably spend a whole hour on this, but how do you invest kids’ money? Let’s just say it’s not for, it’s not a long-term keep it till you’re 60 thing. Because if that’s the case, you just go, my advice be like, be very aggressive with your allocation and let it ride for four decades, man. How cool would that be? But if it’s meant to be used at age 18, 19, 20, 21, how we invest in kids? What do you tell people?

Matt Mulcock:
Yeah. Well, what you just said is the first thing is talking about what is your timeframe for … You have to kind of guess a little bit just like you would with your own retirement. But timeframe is the number one factor here. When do you think your kids are going to use this money or you want them to use this money? So, if it’s, let’s say your kids, and then you just kind of backtracked from that, let’s see your kid’s five and you’re starting to save for them. And you’re saying, you know what, I really want them to be using this for college. That’s the goal. Okay, you’re talking 13 years here. That’s going to be the starting point. We’re not going to go a hundred percent stock at that point. It’s not a long enough timeframe for us to weather the ups and downs. So, we’re going to start there and try to find an allocation, a mix of stocks and bonds that line up with that timeframe. I don’t know if I’d even give you a number now because it’s so general.

Ryan Isaac:
That’s fare. Yeah. But you’re just saying you probably wouldn’t want to be too aggressive just because most kids, if it’s for college age, that’s a short timeframe. And for most people I know there’s exceptions to this, but for most people, the balances in these kids’ accounts are not so large. That even a good return is super meaningful in terms of raw dollars that get returned back to the account. So, I always like to just remind people, look, in order to get a high percentage return, we have to take a lot of risk that we might not want to take because in your example, they got 13 years. But in like the last five years, you can’t really take the same amount of risk. If there was a big market downturn or a giant bear market that lasted two or three years, which is possible, those last few years you would just be trying to recover some principal probably.

Ryan Isaac:
And so I kind of like, man, you want this thing to outpace inflation. You want it to grow a little bit. But you don’t want to lose any of the money. Especially in the last couple of years of it just, that was the timing of it. You wouldn’t want to have a downmarket in the year that you knew you had to use it. So, I like to start, this is my baseline, I just try to encourage people to take a moderate approach with kids investing. Something you could leave, honestly. That you don’t have to tweak every year because you start with a 13 year time horizon. But within a few years now you’re down to single digit years. And then a few years after that, now you’re into three or four years before they for sure need the money. And then every year you feel like you’re just tweaking that thing, trying to mess it up.

Ryan Isaac:
And the accounts aren’t even that big, usually. For everyone listening, who’s like, man, I’m just trying to pay my student loans back and run a practice and save a few bucks for myself and live, pay for my kids’ lifestyle. We live in a decent home, we drive a couple of decent cars, try to take a vacation every year. And they eat good food. And I take them to Chick-fil-A every once in a while.

Matt Mulcock:
I’m just trying to afford diapers right now.

Ryan Isaac:
I’m just trying to like, I’m trying to just live. And all this stuff sounds great, but I’m not even close to this. Now I feel like worse and guilty about it. I’ll just say that there’s a lot of parents, a lot of parents, a lot of dentists who don’t have a lot of cashflow on top of taking care of themselves, which I still think is a priority over kids’ savings. My personal opinion. There’s a lot of parents who just say, look, by the time my kids go to college, I will be mid or peak earning years of my career.

Ryan Isaac:
If I keep pushing on this business, I’ll have less debt than I do today. I should have a higher production, higher income, good profitability. And so I’ll just cashflow when I get there as much as I can without ruining my own life. And that’s what I can do. And if every once in a while you get an extra, a little bit of money to chuck in a kid’s account, I’ll do it. But I’m just going to have to grow my career and hope that when I hit that point in my career, in their lives, that I’ve got some cashflow to help out. And I think that’s fine too.

Matt Mulcock:
Number one priority is instilling in them characteristics and principles that are going to lead to them being able to earn money right. That’s going to be more important than just handing them money no matter what.

Ryan Isaac:
Well, that could be a whole other episode. About horror stories about handing kids a lot of money.

Matt Mulcock:
Yep, definitely. So, to your point, Ryan, I totally agree. Don’t feel guilty if you’re in a situation right now where you’re thinking, man, I can’t even like save, I can’t even get to the 20% savings rate right now. Let alone put money away from my kids. [crosstalk 00:36:48].

Ryan Isaac:
I’m not even funding my own Roth.

Matt Mulcock:
Exactly. Yeah, exactly. I’m sure people out there right now are like, man, I’m just trying to get my debt paid off. [crosstalk 00:36:57]. So, don’t be stressing about that.

Ryan Isaac:
Keep trucking, as they say in the trucking industry.

Matt Mulcock:
Keep trucking, you’re doing great.

Ryan Isaac:
Is that they say, keep trucking-

Matt Mulcock:
Sure.

Ryan Isaac:
… in the trucking industry?

Matt Mulcock:
Yeah. I’m sure.

Ryan Isaac:
Keep trucking. Keep those good financial habits up. And we’ll just wrap it up with this. If you’re in a spot where you’re just trying to grasp your own personal good financial habits. What do I do with my extra money? How do I even save for myself and invest in myself and stick to an investment plan and all that kind of stuff? That’s what we do. That’s what Dentist Advisors was born to do on this planet. That’s what we do. So, you can check out all the stuff that we do, how we work, our process, the type of clients that hire us, just go to dentistadvisors.com, learn everything you can. But if you want to chat with one of us on the website, click on the free consultation button and schedule a chat with one of our advisors. Or if you want to post a question to us, go to the dentist advisors discussion group on Facebook, post a question, we’ll post an answer. Matt, thanks for joining us.

Matt Mulcock:
Yeah. Thanks Ryan. Enjoy sunny California.

Ryan Isaac:
We will enjoy it. And we’ll catch you all next time. Thanks for tuning in and listening and have a great week everybody. Goodbye.

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