March 13, 2019

It is becoming increasingly difficult for children to have better lives than their parents. The high cost of education and the shrinking middle class are just two of reasons for this. Not too long ago you could make enough money at a part time job to pay for almost all of your college education. And when you graduated you could get a really good job without much debt. Some kids can still do that. But there are 42 million Americans that owe $1.4 trillion in student loan debt. That’s over $33,000 per borrower. Just imagine if you were getting married, trying to start a family and buy a house with this debt. Life is tough enough without starting out in a big hole.  I can’t solve this problem in a short column but I can give you two ideas on how you as parents can help financially.

The first is the 529 college savings plan. It is an excellent way for parents, grand parents and family to contribute to a child’s education. The 529 is a special account you can set up where you as the account owner can designate a beneficiary. Any earnings on the money you put in this account is tax free as long as you use it for qualified education expenses. The account owner is in control of the account. The owner invests the money and distributes the money. They can even change the beneficiary. Another feature is that the owner can invite other people to contribute to the account. So Aunt Millie can put a $25 birthday gift in the 529 instead of buying a present or a savings bond.

 Every state has one or more 529 plans available and you can invest in any state’s 529 and use the money anywhere so it makes sense to get a plan that that has good investment choices and low expenses. 529 plans that financial advisors sell are all a bad deal. They are expensive with limited high cost investment choices. The direct 529 plans direct with the state are almost always the way to go.

Here in Nebraska we have a really great plan available at It is one of the best in the country. The added benefit of contributing to this plan if you are a Nebraska resident is that you receive a state income tax deduction of up to $10,000. You can also get this deduction if you roll over another state’s 529 that a broker sold you into the Nebraska plan.

The second way parents can help is rarely used although I have been recommending it for years as a way to save, build wealth and teach kids about investing. And that is the ROTH IRA for kids. There are two things you have to remember. Minors cannot open a ROTH IRA account. An adult must act as custodian until the minor becomes an adult at which time the money becomes theirs. The other thing is that there are limits to how much kids can invest in the ROTH IRA.

The 2019 ROTH IRA contribution limit is $6,000. Any kid who has earned income can contribute up to the amount they earned or $6,000 which ever is less. So if a kid earns $100 mowing lawns, babysitting, working around your business or a real job, $100 can go into a ROTH IRA. The money that actually goes into the kids ROTH IRA can come from parents or grandparents.

It is worth doing because $100 saved in a ROTH at age 10 and earning 9% per year until that kid retires becomes $11,400, tax free. If you string a few of those contributions together while your kids are young you could really help them in the long run.