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When a Client’s Child Graduates, Here’s How to Steer Money Talks

June 30, 2022, 8:45 AM

New graduates entering the workforce this summer face complicated financial decisions—like how much to save, how much salary to allocate to a 401(k) if one is provided by an employer, whether to open an IRA if they’re an independent contractor, and how to budget for major purchases and file their own taxes.

Because these graduates are new to the workforce or just a few years into their careers, it’s unlikely they are seeing a financial professional. And while generic advice is easy to come by, the best financial strategies completely depend on one’s individual circumstances. That’s where the financial planner, accountant, or CPA has an important opportunity to engage.

This might seem obvious, but in my time as a wealth strategist at Capital Group and previously as a tax attorney for more than a decade, I’ve encountered countless retirement-age parents and fresh grads who simply don’t talk to each other enough about money and finances. In fact, Capital Group studied this and found most people would rather discuss anything besides money.

Any transition time—whether it be college graduation, marriage, or the arrival of a child—is a great time to initiate family financial conversations, whether you’re a financial adviser, a CPA, or a tax accountant or attorney. You can help your clients, and those young grads, get comfortable asking the right financial questions at this time in their lives. When I think back to when I was starting my own career, I wish I had asked more (financial) questions.

When talking to a new graduate, you may want to discuss some tax-specific questions they probably haven’t considered. Here are just a few that should be prioritized.

What Can Be Done With Remaining 529 Funds?

I’ve worked with families who have opened 529 education savings accounts and contributed generously, then put remaining money to creatively good use. These 529s can be used for graduate school down the line, to offset some qualified apprenticeship expenses, or to help a younger sibling. A client might also be best served by letting the money remain there, growing for their own future children. 529 funds can be used for many things, and not everyone is aware of that flexibility and the options they offer. Tax-advantaged treatment applies to savings used for qualified education expenses and state tax treatment varies.

That said, it is only if withdrawals from a 529 are used for purposes other than qualified education expenses that earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax. Some states take different approaches to the income tax treatment of 529 withdrawals. For example, withdrawals for K–12 expenses may not be exempt from state tax in certain states. Qualified education expenses include expenses for fees, books, supplies, and equipment required for certain apprenticeship programs.

What Help Will Grads Receive From Family?

There is an interesting nuance here, in that parental support for adult children is on the rise across income brackets. A recent Pew Research Center study found that a record number of American adults are living with their parents. And the share of the US population living in multigenerational households rose to 18% last year.

Figuring out how best to help, but without hindering the child’s growing financial aptitude, is an important balance you can help parents find. Because older generations have accumulated more wealth and been through entire market cycles, parents have an opportunity to help kids invest for their own retirement and make smart money decisions. As a parent, the best way to help might be offering a rent-free place to live, subsidizing rent so children are afforded the opportunity to invest more for their futures, or providing access to the professional advice they’ll need to thrive long-term.

How Do You Decipher and Follow ‘Good’ Advice?

For starters, help parents and their young grads overestimate the young adult’s tax withholding. It’s better to get a refund than be hit with a surprise, especially when a young adult is just starting out, and especially if you have the support of family. Encourage them to contribute to a retirement account. You can also help explain why recent graduates are usually well-suited to set up a Roth IRA account if they’re under the income limit. My real message here is: beware generic advice.

Those who are just starting out in the workplace don’t always work with financial advisers. At this age, the best sources of advice are still commonly sought from family and friends, and especially from a parent’s financial professional.

Here’s an example I often use with new graduates to illustrate the value of thoughtful advice. If a recent grad thinks they might be interested in owning a home one day, then following the generic financial guidance and saving solely through retirement accounts may not put them in the strongest position for their first mortgage, because only a fraction of those funds may factor into securing that loan. If they plan for that home purchase with professional advice tailored to their goals and situation, they’re likely to find a better saving strategy.

Financial philosophies are not created overnight; they’re honed over time. Rather than setting a philosophy in one’s 20s that parents hope will carry through into retirement, encourage your clients and their families to think about their financial plan in three- to five-year increments. If they’re part of the growing number of freelancers and contractors in the workforce, this brings an entirely different tax situation. The nature of an individual’s career and employment matter here, and these may change as an individual ages.

This is where they need just one conversation with a qualified financial professional. For the professional, it’s an opportunity to invest in a long-term client and a way to build their business. Talk to the parents and get them talking to their children—and to you.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Leslie Geller is an attorney and wealth strategist at Capital Group. Geller works with financial advisers with high-net-worth clients providing support on all matters related to taxation, wealth transfer, and family governance.

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