Question:
I’d like to know the best way to prepare a minor for receiving their custodial account in a way that promotes responsible long-term ownership of the stock shares given/received. My niece is 19, and will be coming home from school for the holidays. I want to begin the process of her financial education now, since I think Schwab will tell her about the account within six months time. I’d also like to include one or more books that she should read to reinforce the lesson.
Answer:
With a custodial account, once the child reaches the age of majority, the funds legally belong to the child. The child can do what they want with the money, so it is understandable that you’d want to give your niece a solid educational foundation for inheriting money.
First, it is important for her to note that highly appreciated stock with a low cost basis should be handled carefully. She could be subject to significant capital gains tax when she sells shares. Assets that have been in the family many years should stay in the family if possible, and be used only for purposes that will benefit the individual over the long term. You’ll likely want to explain that the gift should not be viewed as an ATM or a checking account. Likely, the investment account is meant to help her with the down payment on a first home, tuition for graduate school, starting a business, etc.
If she has earned income during the year, she could roll her assets into a Roth IRA. Through the power of compounding and a near 45-year time horizon, her investment could grow to a substantial amount, and potentially tax free, for her retirement.
You may also consider some of the following books that teach responsible financial habits:
- “Rich Dad, Poor Dad” by Robert Kiyosaki. Kiyosaki stresses the importance of financial literacy, and presents financial independence, as the ultimate goal and a way to avoid the rat race of corporate America.
- “Think & Grow Rich” by Napoleon Hill. Written during the Great Depression, Hill published 13 principles for success and personal achievement from his observations and research. Given this today’s emphasis on shock-value entertainment and negative news, this book provides valuable insight into the psychology of success and abundance.
- “Complete Guide to Personal Finance for Teenagers” by Tamsen Butler. This book is filled with suggestions from financial and family counselors with tips and instructions on topics from managing credit to learn about investment options, taxes, and budgets.
Question:
U.S. politicians are at it again. Will the employment tax cut be extended, and does it matter?
Answer:
Nothing has changed on the domestic political front in the past six months. Democrats are still trying to raise taxes on “the rich,” while Republicans are working to avoid any tax increase. The current proposal by the Democrats is to extend the Social Security tax cut—originally from 6.2% down to 4.2% for 2011— and increase the cut so that Social Security tax is only 3.1% for 2012. Republicans agree with the extension, but they insist that this should be paid for in some manner.
Democrats have offered to pay for the Social Security cut by adding a 3.25% surtax to personal income in excess of $1 million. Republicans are looking to pay for the cut by freezing Federal employee pay and a reduction of federal employees of 10% by 2015. Although most of the politicians at the heart of the matter insist the extension will come through, we heard the same talk prior to the failure of the debt talks in November. Additionally, some politicians have stated the Social Security system will be in peril if the tax tie is broken.
It has been stated that when Franklin Roosevelt instated the Social Security system initially, he tied the tax to the program to give recipients a sense of having paid into the fund. Using other sources may forever break that tie and put the system in question longer term. We believe this current initiative will fail. The only worry we have is that it may negatively impact consumer sentiment as was done in the fall of 2011, during the debt ceiling debate. The effect of that negative consumer sentiment was short-lived, given the robust Black Friday sales. We believe the sentimental effects of end of the Social Security tax break will be similarly short-lived, although the economic effects, stated at $116.9 billion, may slow consumption slightly.
Question:
Black Friday was good as was Cyber Monday, but analysts expect the consumer to fall flat after Christmas. Why, and do you agree?
Answer:
Market analysts are looking for a reversion to the long-term mean in consumer savings, which is 5.3%. Since recent measures put the savings rate at 3.6%, well below the May 2008 high of 8.3%, analysts believe it is an anomaly. Ultimately, they think consumers learned from the recession when they realized their efforts at saving for the future have been weak. It is clear that the near zero savings rates in the mid-2000s were ridiculous and unsustainable. Home equity loans during the housing bubble allowed people to spend in excess of their income. That is no longer the case.
We believe the lower savings rates reflect consumer attitudes about the future of the economy. The clouds have not cleared, but the storm seems to have passed. Savings rates may increase, but only as employment improves and income continues to grow. Spending and savings habits of baby boomers are different than their parents. Baby boomers consume more, and among those who do actually save, they have provided well for their future. However, looking at statistics on retirement savings will show you that way too many people have done a poor job of saving. Unfortunately, we do not see that improving no matter what the economy does.
When economies fall into recession, central banks lower interest rates to encourage consumption (or at least discourage saving). With interest rates low, why is it that consumers continue to increase the amount they save relative to booming times? We have seen rates near 0% for more than two years, and the economy continues to drag along growing very slowly. Corporations seem to be showing signs of earnings growth, but not so much as to encourage them to hire new employees and expand their operations. We believe the lack of coordination between monetary policy and fiscal policy (increased regulation) is what is causing the lack of growth in the economy.
Disclosures:
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.
