by Douglas D. Smith
|Investment Advice for the Bar/Bat Mitzvah|
Everything went perfect. The guests had a wonderful time. The photographer got all of the pictures you wanted. The hall even let the band play for an extra half hour.
You wake up the next morning and learn the power of multiplication. All of those envelopes collected turned into thousands of dollars. And it's all theirs. Your child may now be an adult, but making smart money choices will still take a couple of years to master. We hope we can influence these choices.
A good place to start is to give Tzedakah. Let your child make the decision as to the recipient, whether it's a Temple fund, Trees for Israel, or New York firefighters. Some research into the recipient's activities is a good learning tool. Probably the next decision is "How much do I get to Spend"! Hopefully, we keep it reasonable.
Now comes the tough part. In previous issues I've suggested avoiding high risk stocks. While their upside is fabulous, it's difficult to explain to a young adult a significant loss in value. We may be still trying to accept our retirement fund losses. Consider instead dividend reinvestment plans of high quality, high dividend companies. These are the gifts that keep on growing, and become difficult to dispose of. Certificates of deposits are nice if you want to guarantee that money will be there in five years, but the returns now are quite low.
One method to avoid all of these problems and decisions is to give the gift to the Bar/Bat Mitzah utilizing the Uniform Gifts to Minors Act. This acknowledges that the account belongs to the child, but until the age of 18 is controlled by the donor. The donor then makes the investment choices.
Some unique gift suggestions for donors were recently enhanced by the Government, specifically College Savings Plans. These plans are enacted in all states, but let's use Maryland's plans for this discussion. You can contribute up to $175,000 for each child. You can front end 5 years worth of $10,000 gift tax deductions. All earnings are tax free, provided they're used for qualifying expenses. Maryland also has a prepaid fund, where you can lock in tomorrows' college costs at today's prices. Sign up for as little as $25 per month, and guarantee college tomorrow. These two plans will be managed by T. Rowe Price, and are guaranteed by Maryland. You even get up to a $2,500 tax deduction (10 year carryover), worth about $200 in tax money. These plans will start taking contributions December 1, 2001. For more information log on to www.collegesavingsmd.org. Other resources include www.savingsforcollege.com and "The Best Way to Save for College" by Joseph F. Hurley, CPA.
For the truly creative and tax savvy, GRATS are back. Low interest rates and recent courts decisions have generated lots of interest in this estate planning tool.
Mazel Tov to you and your family!
Douglas D. Smith, CPA
by Matthew W. Taylor
According to a recent study, 69 percent of college students have a credit
card in their own name, with an average unpaid balance of $968 (1). Credit
cards are a fact of life for most college students and most teenagers - just
as they are for their parents. The process of qualifying for a credit card
is simple compared with the detailed applications people must go through to
apply for such things as student loans and home mortgages.
Trying to stop young adults from using credit cards is probably futile. It
makes far more sense to help them understand the costs and risks associated
with the use of credit cards before they first have access to one.
For many, Bar/Bat Mitzvah is the first step into a wider world. Helping
these young adults understand credit and use it wisely can make these first
financial steps secure, confident, and in the right direction. The following
are four simple steps the understanding credit:
Mazel Tov to you and your family!
- Help yourself and your family understand the importance of a good credit
history. Without good credit, it can be difficult to lease an apartment, buy
a house, or even buy a car.
- Do a trial run. Give teenagers a debit card without overdraft protection
or a prepaid card with a low limit. This can provide them with some credit
experience without the possibility of a big spending spree.
- Debunk the myth of easy credit. Help teenagers understand how interest
accrues and increases the cost of purchases over time. Explain late fees.
Help them understand how much credit really costs.
- Monitor their use and discuss problems. Meet with teenagers monthly and
review their credit-card statement. Discuss any problems you find - such as
late payments or inappropriate purchases that would have been more
appropriately paid out of pocket.
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