Once your children have graduated from college and landed adult jobs out in the “real world”, most parents breathe a sigh of relief. You don’t worry about them so much anymore, and feel confident that they can navigate their way through most situations.
However, most of us made some financial mistakes when we were younger, didn’t we? In particular, we know that young people often neglect their retirement savings. As your kids enter this next phase of their lives, you can pass on some wisdom that will help them for the rest of their lives.
A traditional retirement account can lower your income tax liability. Up to a certain annual limit, contributions to a traditional 401(k) or IRA are tax deductible. This lowers overall taxable income, meaning you pay less in income taxes.
A Roth IRA can lower tax liability in retirement. By contrast with traditional retirement accounts, a Roth IRA can lower your tax burden in retirement. Contributions are made with after-tax dollars during your working years, but withdrawals from the account won’t be taxed in retirement. Many people elect to save money in both types of account, depending upon their financial capabilities and needs.
A Health Savings Account might be a good option for younger people. Healthy, younger people often elect to save money on premiums by enrolling in high-deductible health insurance plans. Because of the high deductibles, they might be eligible to enroll in a Health Savings Account (HSA). An HSA allows you to set aside pre-tax money to be used toward qualified medical expenses. But if the money isn’t used in any given year, it is rolled over to the next year, potentially all the way to retirement. Therefore, an HSA can provide tax savings, but also help you to save for medical expenses in retirement.
Consider all insurance options. Just because you’re young and healthy, doesn’t mean nothing can happen to you. Even young people need a basic life insurance plan, and this need becomes more pressing once they you start a family. Disability insurance is another inexpensive option for the younger generation. In the event of an accident or serious illness, the payout can provide much-needed income to keep the household secure.
Consult with a financial advisor. As your adult children begin to make these complicated financial decisions, encourage them to consult with a financial advisor. Taking this step can help them to fully investigate all of their options, and prevent costly missed opportunities.