Use The Child Tax Credit To Build Generational Wealth

When you saw that the child tax credit doubled for 2018 what was your response?  If you were like me “Wwwwoooo Money!” was probably the first thing that entered your mind and you focused on what you would spend $1,000 on the second you got your refund.  Here’s an idea.  Use this new found money to build wealth for your children.

Why Give The Child Tax Credit To My Kids?

  1. You were going to waste it otherwise: I’m pretty sure you were planning on spending that $1,000 on something you didn’t actually need that won’t grow your wealth long term.  A new TV, a Playstation 4, a couch, part of a down payment on an expensive car? That money was going to go down the drain.  Giving it to your kids will make you feel good about providing for their future and will keep you from essentially lighting the money on fire.
  2. It is better to give away assets before they appreciate:  Let’s say you were going to invest the money, but for yourself. That’s great, you may still have 30 years for that money to grow before you reach retirement. If you are overall financially stable and are on track to afford retirement, you may plan on leaving an inheritance to your children.  Assuming you live another 50 years that $1,000 you received this year will grow to $30,000.  You never used the money and your kids didn’t receive it until you died. In the future estate tax laws may be vastly different than they are today and trying to transfer $30,000 to your child may cause some negative tax consequences. By the time you pass your children will most likely already be established adults and could even be entering retirement on their own.
  3. Your kids have time on their side: You may have 30 years until retirement, but your kids have 50, or even 60 years to go.  over 60 years that $1,000 will grow to $58,000. If your kids are young that $1,000 could triple to $3,000 by the time they are adults.

Ok, So HOW Should I Give Them The Money?

First of all, I’m not talking about handing them $1,000 and asking them to have fun with it. There are 3 good options here that I would suggest:

First, save the money for college.  Put it into a 529 plan in which you can invest the money. It will grow tax free and as long as you use it for college expenses you won’t owe any federal income taxes when the money is used.

If college is already covered then I suggest starting a taxable brokerage account for them.  Don’t worry, they won’t pay any tax.  Invest the money in a low yield growth fund like the Vanguard Mid Cap Growth fund.  The total dividends paid by the fund won’t be enough to force your child to file a tax return.  Then when your child gets his or her first job use this money to fully fund a Roth IRA for them for the first few years. Now that money can grow tax free forever and in retirement can be withdrawn tax free.

As a 3rd option, you could build up this money for a launching account.  This could be used to provide funds for a first or second car, an apartment lease, or for helping them start their own business. I would still invest the money in a taxable brokerage account in the interim until they are ready to use it, and just instead of filtering the money into a Roth IRA, take the money out and spend it on these items.

But My Kid Is A Baby, This Seems Like A Waste!

If your kid is a baby then giving them half of the child tax credit you receive is by far the best thing you can do with the money.  What if you did this every year for all 17 years that a child qualifies for the child tax credit?  Invested in a total stock market index fund averaging 7% returns, by age 18 your child would have over $33,000 for college! Of course if you gave your child the whole thing that money would be $66,000.  This is a serious dent in the total cost of college, especially if you use proper planning to pay for college.

Building Generational Wealth Isn’t All Or Nothing:

You don’t need to be a Walton or a Trump to set your kids up for success.  Starting off by using the extra tax credit you got this year is a great beginning to creating generational wealth in your family.

What do you think about using the expanded Child Tax Credit to build generational wealth?

John C. started Action Economics in 2013 as a way to gain more knowledge on personal financial planning and to share that knowledge with others. Action Economics focuses on paying off the house, reducing taxes, and building wealth. John uses the free tool Personal Capital to track his net worth and posts quarterly updates on his finances. Check out the Action Economics archives section for all past posts.

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