Dear Liz: This is a little unorthodox, but I’m hoping you can help. I have six nieces and nephews from my various brothers and sisters. They range in age from babies to teenagers. When they get older, I want to be able to assist them with therapy sessions — not because I think their parents will mess them up, but because I believe mental health is important to success. I imagine telling them about this fund when they are about 18 or so, so I’d need money I can access in five to 10 years. How should I start saving for this? What accounts should I use? Should I open one account for each of them, and how can I manage this the best way for my taxes?
Answer: Custodial accounts could save money on taxes, but the money would become entirely theirs at a certain point (typically age 18 or 21) and you would lose control over what they did with it. You could hire an attorney to draft trusts that would have more restrictions, but that will cost hundreds or even thousands of dollars to set up and administer.
The simplest solution would be to set up one or more accounts in your own name that you’ve earmarked for this purpose. You would pay taxes on any interest, dividends and capital gains accrued, but you would maintain control of the money and it wouldn’t affect the children’s ability to get financial aid in college.
Keeping control also gives you the flexibility to use the money for another purpose, in case your young relatives don’t need or want therapy. Mental health challenges — although widespread — aren’t universal. A survey funded by the National Institute of Mental Health found 46% of adults had a psychiatric disorder at some time in the past, and one-quarter had experienced a problem in the previous year. The most common disorders were major depression (17%), alcohol abuse (13%) and social anxiety disorder (12%).
If you’re concerned about their success and want to help with money they’re even more likely to need, consider funding 529 college savings plans. The money can grow tax-deferred and be used tax-free at virtually any post-secondary school in the U.S., as well as some abroad. You can maintain control and have the flexibility to move money to other beneficiaries, or to withdraw it at any time (although you’d pay penalties and taxes on any earnings).
Social Security for a child
Dear Liz: I will be 65 next year and have an 8-year-old son. I have been told by various people that I can receive an extra Social Security allowance for him until he is 18. These same people also said it would reduce my benefit permanently. Is that correct?
Answer: Yes, plus your benefit would be subject to the Social Security earnings test if you continue to work. The earnings test applies when you start Social Security before your full retirement age, which is 66 and 2 months, and could temporarily reduce or even eliminate your benefit.
The earnings test disappears at full retirement age, which is why it’s usually good to wait until then to apply if you continue to work. Most people benefit from delaying the start of Social Security even longer, but your situation may be one of the exceptions because the child benefit can be a valuable, if temporary, addition to the family finances.
A child can receive up to half the parent’s full retirement benefit, typically until the child turns 18. (Benefits can continue as late as age 19 if the child is still in high school.) The parent must apply for his or her own benefit to trigger a child benefit. Also, there’s a limit to how much a family can receive based on one worker’s earnings record. This family maximum varies but can be from 150% to 180% of the parent’s full benefit amount.
Free Social Security claiming calculators typically aren’t set up to handle the possibility of child benefits, so you may want to use one of the paid versions such as Maximize My Social Security or Social Security Solutions to determine your best course.
Liz Weston, certified financial planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.
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