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Rory O’Hara, CFP®, CRPC®, is the founder and senior managing partner at Ausperity Private Wealth.
Summer is over, and fall is upon us, bringing the familiar rhythm of a new school year. For many parents, it’s a time to reflect on the future. Naturally, many begin to think about how they can best support their children, not only by paying for college but also by helping them buy a home or achieve long-term financial stability.
These are serious—and expensive—questions. Consider that tuition at four-year public institutions increased almost 37% from 2010 to 2023. Meanwhile, home prices have reached all-time highs, helping to explain why the average age of a first-time buyer reached 38 years old last year, a record high.
In light of such data, strategies like opening 529 plans or Uniform Transfers to Minors Act (UTMA) accounts may no longer be enough. Parents need better ways to transfer wealth to children and effectively grow that money in the most tax-efficient manner possible.
Here are four powerful—and often overlooked—approaches:
Roth IRA Contributions For Kids
Retirement accounts aren’t just for adults. For kids under 18 who earn income, parents can open a Roth IRA and contribute up to $7,000 a year. So, if a child earns $7,000 from babysitting, parents can contribute $7,000. If a child earns $10,000 walking dogs, parents can still contribute $7,000.
Parents who own businesses can also pay children a reasonable wage for legitimate work (e.g., filing, marketing, attending client events). Here’s the magic: These contributions grow tax-free for decades. And since withdrawals in retirement are tax-free, this is one of the most effective long-term wealth strategies available.
It’s a move that helps children build strong financial habits while planting the seeds of lifelong compounding.
‘Overfunding’ 529s
Wealthier families may intentionally “overfund” 529s, since unused funds can be rolled into a child’s Roth IRA once they begin working. Under the SECURE 2.0 Act, passed by Congress in 2022, parents can roll over (tax- and penalty-free) a lifetime maximum of $35,000 from a 529 to the child’s Roth IRA. Parents can give their children a head start on both their education and retirement.
A couple of caveats: Parents must have maintained the 529 for at least 15 years, and the transfer amount must come from contributions made at least five years before the transfer date.
Lending Vs. Giving
Gifting sounds generous, but lending can be smarter.
Rather than handing over cash, parents can offer low-interest loans to children for large expenses, such as a home down payment, using the IRS’s Applicable Federal Rates (AFRs), which are generally much lower than commercial rates. Done properly, intra-family loans avoid triggering federal gift tax exclusions while preserving family capital.
In essence, this strategy empowers children while maintaining structure and control—two factors that can make a big difference over time.
Stock, Not Cash
Parents often default to gifting cash, but gifting appreciated stock can produce greater tax efficiency.
Here’s why: When children sell the stock, they pay capital gains tax based on their income bracket, which is usually much lower than their parents’. It’s a simple shift that can save families thousands in taxes while encouraging investment literacy and long-term thinking.
Conclusion
Parents need to take the long view on their children’s future needs, whether that’s college tuition or buying a home. But given the sharp price increases in recent years, even financially secure parents need to think beyond 529s and UTMAs.
They should consider strategies that might sound unusual or counterintuitive, such as opening retirement accounts for minors, lending money instead of gifting cash and transferring stock rather than cash. These methods can ultimately allow parents to pass wealth in ways that better shield their children’s money and investment gains from federal taxes.
In the end, the best legacy isn’t just the money we leave behind. It’s the mindset we pass on.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., a SEC Registered Investment Adviser. Ausperity Private Wealth is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.