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Youth and Wisdom

The Irish author George Bernard Shaw famously declared that “youth is wasted on the young!”. While this statement is open for much interpretation and debate, it reminds us, parents, grandparents, aunts, and uncles, that we serve as stewards and coaches of our children’s, grandchildren’s, nieces', nephews', mentees', etc., financial well-being. Financial freedom often occurs because someone started saving and investing early, allowing those earnings to compound and grow. 


One of the most important lessons in finance is from Albert Einstein. “Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t …. Pays it.” The one thing youth have for them is time, and starting early on any investment allows the magic of compound interest to work. 


There are many ways to illustrate the power of compounding. But let’s start with a lesson your author’s nine-year-old daughter shared with the family the other night. She asked, “Would you rather have a penny that doubles daily? Or $1 million dollars?” 


To the author's dismay, everyone in the family chose the $1 million (except for your author and his nine-year-old! – the two teenagers failed and will be losing their allowance). But the power of compounding is illustrated! In a mere 30 days, your doubling penny would be worth over $5 million. This is the power of compounding taught in 3rd grade. 


As we relate that to investment accounts, emergency savings accounts, college savings accounts, etc., we can see the power of compound interest on a $6,000 initial investment (following chart). While it is never too late to begin saving for goals, we know the earlier we start, the more success we will have. 


Below, we look at a few ways that we, family stewards of wealth, can invest for the next generation and help them achieve their financial goals. What an impact we can have. 


College Savings: 529 Plans 


A 529 college savings plan is a state-sponsored investment plan that enables you to save money for a beneficiary and pay for education expenses. You can withdraw funds tax-free to cover nearly any type of college expense. 


529 tax advantage plans have several benefits. Your investments grow tax-free, and you also withdraw funds tax-free for education expenses, such as tuition, room and board, and assigned textbooks. You can withdraw from education savings plan accounts at any college, university, or trade school. 


A change to the plans from the Tax Cuts and Jobs Act in 2017 now allows for $10,000 per year, per beneficiary, for tuition at any public, private, or religious elementary or secondary school. 


Another recent significant change is the ability to transfer unused 529 plan assets into a Roth IRA for the beneficiary. As part of the Secure Act 2.0, beginning in 2024, up to $7,000 per year (with an extra $1,000 for those 50 and over) can be moved into a Roth IRA. The maximum lifetime limit per beneficiary is $35,000. 


There are several nuances and requirements for the new legislation. It is an excellent enhancement to 529 plans, but don't hesitate to get in touch with your Charter Oak Advisor so we can help you with the nuance of these rule changes and your unique situation. 


Roth IRA for kids


A Roth IRA for Kids is a tax-advantaged retirement account for a child with earned income. The account is managed by an adult (the custodian) and then transferred to the child at a certain age (typically between 18 and 25, depending on the state). 


You can contribute 100% of their earned income, up to a maximum of $7,000 for 2024 or. Earned income can be from babysitting, summer jobs, or another source of earned income. The account is funded with after-tax dollars, and the assets grow tax-deferred and can be withdrawn tax-free at age 591/2. Contributions can be withdrawn at any time without taxes or penalties. 


Fidelity Youth Account


Back to those teenagers. Fidelity has a relatively new account for kids ages 13 to 17. The Fidelity Youth Account is a teen-owned brokerage account. The account holder downloads the app (there is one for both a parent or guardian and the teen) and can transact and view all their holdings and balances there. The educational content on the app helps teens understand stocks, bonds, compound interest, and other financial topics. They can then invest their money in as little as $1 increments because of the ability to buy fractional shares. 


The cash balance in the account is earning well over the national average at 4.97% (as of February 16, 2024). This can be linked to a debit card, with set spending limits, that they can use to establish budgets and goals. 


This can be an excellent way for teens to learn more about money, how to invest, and how to take ownership of their early financial success.  More information can be found here.