24 Jun Can I place conditions on money I give my son?

Q. If I want to help my son to save — he is a new college grad and has a full time job that has a 401(k) — would it be wrong for me to offer him matching funds of my own to make sure he puts money away? I would want him to show me copies of his pay stubs or his 401(k) account as proof. I know that sounds totally helicopter parent but I want to make sure he follows through.
— Mom

A. Congratulations to you both!

Your son is now out in the “real world” and you helped get him there.

It’s wonderful that you want to help your son start saving and preparing for retirement today.

The money he saves today is the most powerful money he’ll ever save because it will have decades of growth, said Jeanne Kane, a certified financial planner with OneDigital in Boonton.

If his company offers a Roth 401(k), that’s where he should start, Kane said.

Contributions to a Roth are made after-tax and grow tax-free, Kane said, using what she calls a farming analogy.

“A Roth 401(k) is like paying taxes on a seed and a pre-tax 401(k) is like paying taxes on the crop,” she said. “With a Roth, you pay taxes today on a smaller amount — the contribution.”

She said the pre-tax 401(k) contribution gives you a tax deduction, but the pre-tax 401(k) distributions are taxed after decades of growth.

“Which would you rather pay taxes on? The seed!” she said.

Distributions from the Roth are tax-free in retirement, she said, noting that contributions and earnings in a Roth 401(k) can be withdrawn without paying taxes and penalties if you are at least 59½ and had your account open for at least five years.

“He’s young and has decades to work before retirement,” she said. “His income should grow over the years so he’s likely in the lowest tax bracket of his career.”

Next, if the company offers matching funds, he should contribute enough to at least get the full match.

As he considers long-term savings, he needs to create a budget, Kane said.

“A budget will tell him where to go instead of wondering where his money went,” she said. “If you do this together, you will understand his income and expenses.”

And you’ll know how much he can afford to save in the 401(k) and elsewhere, she said.

For the budget, she recommends you start with a 50/30/15/5 plan.

Fifty percent of the budget should be allocated to essential expenses, including rent, food, clothing, gas and other costs, 15% of the budget should be dedicated to retirement savings and 5% of the budget should go towards short-term savings.

This is his emergency fund, Kane said, and he should have three to six months of expenses set aside for unexpected expenses.

“I prefer that this be saved in a separate account from his checking/savings accounts. No comingling with other accounts,” she said. “Make the account inconvenient so it is not easy to access the money. This money is for emergencies only.”

He should have money from his paycheck go directly into this account so it is automatic, she said.

The final 30% is for his other goals, such as for a vacation or a down payment on a house.

Now back to retirement. It’s admirable that you want him to save, but how are your retirement savings?

“We always want you to take care of yourself first, like putting on your air mask before others on the airplane,” she said.

Kane said you have the right to stipulate conditions for giving your son money, but he also has the right to reject those conditions.

“However, requiring pay stubs and 401(k) statements on a regular basis is heavy-handed and tells him that you don’t trust him,” she said. “Do you want that to be your relationship with him as an adult?”

Instead, she suggests you help him set up his 401(k), including choosing investments and the appropriate contribution given his income and your potential bonus help.

You should also have an exit plan. When will you stop helping him save?

“Figure out your plan and tell him up front so he understands when the extra help will scale back or stop,” Kane said.

And what happens if you see him spending money on something that you don’t agree with in the future?

Indeed, money and family can get tricky.

“If you decide to help, you could directly deposit money into his bank account the same day he receives his paycheck. You make him income-neutral,” she said. “Even better, have the money go directly into his emergency fund account. He’ll build that up so he’s handling emergency expenses when they come up vs. coming to you.”

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This story was originally published in June 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.