January 23, 2025
Hey dentist parents! We know you’re pros at creating perfect smiles, but let’s chat about something just as satisfying, setting up your kids for a bright future.
You can save strategically using tools like Roth IRAs, Coverdell ESAs, and 529 plans. Here’s a guide to simplify things for you.
1. Roth IRAs: Dual Purpose Savings
Roth IRAs aren’t just for your retirement. They’re also a hidden gem for your kids’ futures. Here’s why:
- Who Can Use Them? Your kid needs earned income to qualify. Babysitting? Part-time work? Helping out at your practice? All of these count. They can contribute up to $7,000 annually (2024-2025 limits).
- Why Parents Love Them: If they’re working for you, ensure you have a clear job description and a W-2. The IRS loves those details, and it’ll keep things smooth.
- Flexible Funds: Need money for college or emergencies? No problem. Contributions can be withdrawn anytime tax-free. Whatever’s left can keep growing for their retirement.
- No Auto Transfer: You stay in control of the account; there is no automatic handover when they turn 18.
For more information on using IRAs to pay for college, check out our June 2024 article, Employing Your Kids in Your Dental Practice: Roth IRAs for College.
2. Coverdell ESAs: Small but Powerful
Coverdell ESAs might not get all the attention, but they’re a great addition to your savings plan:
- How Much? You can contribute $2,000 a year per kid. It's not a huge amount, but with time and smart investing, it adds up.
- What Happens at 18? The account transfers to your kid, so it’s a good idea to teach them about responsible spending before then.
- Early Wins: Use Coverdell funds for private school tuition, college prep, or even new tech like laptops. Get the most out of it while you’re still calling the shots.
3. 529 Plans: The All-in-One Solution
If savings plans were tools, the 529 would be your all-in-one gadget. Here’s why:
- Big Contributions Welcome: Put in up to $17,000 annually (or $85,000 in a single lump sum using the 5-year rule). Invite their Grandparents to contribute, too!
- Keep Control: You’re the boss here. Even after your kid turns 18, you decide how the money gets used.
- Debt Helper: Use up to $10,000 from a 529 to pay off student loans.
- Ultimate Flexibility: If one child doesn’t need all the funds, transfer them to a sibling or family member, or even into an IRA.
For more information on which 529 Plan we recommend (for Texas Residents), check out our May 2024 article, The Benefits of Utah's My529 Plan for Your Children's College Savings.
Money Management Timeline & Roadmap
Before Age 18
- Start Early: Get those accounts up and running. Time is your best friend when it comes to growing money.
- Plan Ahead: Will your child attend private school, trade school, or college? Decide early and align your accounts accordingly.
- Cover the Now: Use Coverdell ESAs for immediate costs like private school tuition or tutoring while building long-term savings in 529 plans.
At Age 18
- Teach Financial Skills: If they inherit a Coverdell, show them how to budget and spend wisely.
- Guide 529 Usage: Manage the 529 plan and tie its use to achieving goals, such as good grades or career planning.
- Boost Roth Habits: Encourage them to keep contributing to their Roth IRA once they start working. It’s a lifelong win.
Post-College
- Pay Down Loans: Use 529 funds to knock out up to $10,000 in student loans.
- Hand Over Control: Help them take charge of their Roth IRA and teach them the basics of investing.
- Stay Updated: Watch for changes in tax laws or new options for these accounts.
Keeping Things on Track
- Set Rules: Link savings to grades or career goals. A 3.0 GPA or a solid plan for financial independence could be great motivators.
- Put Your “Oxygen Mask” on First: Prioritize your own retirement savings first, you can borrow for their college, but not for your golden years.
- Get Advice: Work with a financial advisor to fine-tune your strategy, especially if scholarships or changes in career paths come into play.
By combining strategic planning with goal setting, you can help your kids avoid or minimize the burden of student loan debt while keeping your finances on point.
Not sure where to start? Contact us today!