The situation: Linda nestled her new baby granddaughter on her lap. “She’s so sweet, although I know she’s been keeping you from sleeping,” she said to her daughter Jennifer.
Jennifer yawned. “It’s not the baby that’s been keeping me up. I’ve been worried about money. Mike and I have a high health insurance deductible, student loans, rent, and now day care.”
“I knew things were tight, but I didn’t realize it was quite so bad,” Linda said.
Jennifer reached for the baby. “I don’t mean to complain,” she said. “We’re doing okay. It’s just that I don’t know how we’re going to save for a house.”
When Linda got home, she told her husband Gary what Jennifer had said. “I hate that they’re dealing with so much financial pressure,” she said.
Gary looked up from his computer. “Maybe we can give them a little money for a down payment,” he suggested.
Linda shook her head. “I don’t know. It’s not that I don’t want to help. But we’re both retired. We need to be careful with our money.”
Before offering money to their adult daughter, what should Linda and Gary consider? Find out how Jessica McBride, a senior financial advisor from Vanguard Personal Advisor Services, weighs in on this hypothetical situation.
It’s natural for parents to want to help their children. Often, the urge is even stronger when grandchildren are involved.
According to a 2015 Pew Research Center poll, 61% of American parents said they supported an adult child financially in the preceding 12 months. To be fair, much of that help was for education-related expenses. Still, a full 19% said they provided help with recurring expenses for something other than education.
But just because it’s common doesn’t mean it’s a good idea.
Here are key questions Linda and Gary (or anyone) should ask themselves before giving their adult child money:
Can we afford it?
Linda and Gary should carefully evaluate their finances to make sure their money will last. A financial advisor could run scenarios to help them make an informed decision.
What are the tax consequences?
Giving Jennifer money could mean higher taxes for Linda and Gary. They might have to pay:
- Higher income taxes. If they take a distribution from a traditional or rollover IRA, they’ll have to pay income taxes on the distribution.
- Capital gains taxes. If they sell from a taxable account, such as a brokerage account, there could be capital gains.
Will more money lead to bigger problems?
A well-intended gift can easily backfire. For example, receiving an influx of cash for a down payment might tempt Jennifer and Mike to buy a bigger house than they can afford. Instead of easing their financial worries, it could end up making things worse down the road. They might wind up facing large monthly payments and bigger utility bills, instead of simply paying rent and saving.
To give Jennifer a boost without creating a dependency, Linda and Gary could:
- Offer nonmonetary help. As grandparents, they could help with child care, reducing those costs for Jennifer and Mike. However, this can sometimes become a burden on grandparents, so Linda and Gary would need to be comfortable setting limits.
- Give selectively. They could offer to pay student loans or contribute to their grandchild’s college savings plan. That way they’d be helping the young couple keep expenses down, but they wouldn’t be enabling them to buy something they can’t afford.
Will we have to give money to our other children as well?
Some parents like keeping things equal with their children. A gift to one child may make the parent feel obligated to provide the same gift to the other children, whether or not they need financial help. This would be an additional drain on Linda and Gary’s retirement savings.
Advice for young adults
This situation raises important issues for young adults as well as their parents.
Many people who are just beginning their careers face big financial challenges: paying off student loans, paying for health care, and saving for retirement. That means they need to be extremely savvy about personal finance, for the short and long term.
Here are some steps Jennifer and Mike could take to put themselves in a stronger position:
- Save in a health savings account (HSA) for medical expenses. Since they have a high-deductible health care plan, Jennifer and Mike are eligible to contribute to an HSA. With a new baby, they’ll be at the doctor’s office often, and with the HSA they can use pre-tax dollars to fund their out-of-pocket health care expenses.
- Use a dependent care flexible spending account for the cost of day care. This is a pre-tax account that allows families to pay for certain services such as preschool and day care. Taking advantage of tax savings can make a significant difference for people living paycheck to paycheck.
- Create a budget. Jennifer and Mike should make a list of all their expenses. By comparing discretionary and nondiscretionary expenses, they can calculate what they can save for a house and take control of their finances.
As young adults, Jennifer and Mike have time on their side. The decisions they make now could have significant payoffs down the road. Maximizing their retirement contributions, buying a home they can afford, and learning to live on less could add up to more than any help they might get from their parents.
While Linda and Gary can offer advice or even financial help, they need to accept that there will be limits to what they can do. It’s up to Jennifer and Mike to take ownership of their money challenges.
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