15 Oct Should I “tax” my kids’ savings?

Q. When my kids get cash gifts, we save half for the long term and they can spend the other half immediately. I’m thinking of starting to charge them “taxes” based on their savings — so the short-term money is taxed more and hopefully they will then save more for the long term instead of spending. What do you think?
— Money mom

A. There are all kinds of strategies to teach your kids about money, and one lesson they will eventually have to learn is about taxes.

The savings lesson is a valuable one they will carry through the rest of their lives — especially the part about knowing they can’t spend everything they earn because they’ll have to plan and save for longer-term goals, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Berkeley Heights.

He said your plan sounds like you’re not actually going to tax the short-term savings, but rather, the short-term spending.

“For example, she could say the normal 50 percent spend has been reduced to 40 percent, as the `spending’ is subject to a 20 percent `consumption tax,'” Maye said. “This would effectively raise the savings to spend ratio from 50/50 to 60/40.”

Maye said from his perspective, getting your kids to save 50 percent of their gifts is already very good.

“I am not sure if making it more complicated will be beneficial or if their eyes will glaze over,” he said of the tax idea, but it’s a good thing if you can get them to save more.

“I hope the lessons you are teaching them translate into them becoming `savers’ rather than `spenders,” Maye said. “I think it is great you are instilling these financial lessons as we all form, for better or worse, our attitudes toward money from our parents.”

And depending on how much money is involved, and how long term your plans are for your kids, you can help them open an IRA under certain circumstances.

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This story was first posted in October 2015.