For many of us baby boomers who are retired or soon to be, the question, “When does the bank close?” is a daunting one for those with adult children still dependent on some sort of financial support.
Having grown up in the post-World War II era, most of us had one and sometimes two working parents to provide for us. Less was more and we learned at an early age the value of a dollar and what savings were all about. How coveted it was for us to earn a “work permit” at the age of 15 and pursue our lifelong working career. Earning 25 cents per hour running errands, shoveling snow, or whatever we could find gave us our first taste of earning a living.
Higher education was a goal for some, but not all had the opportunity or could find the financial resources from their family, savings or student loans. I had to work 40 hours per week at $1 per hour to pay a portion of my education, still graduating with student loans to repay. For all boomers, not just the college educated, a strong work ethic propelled us to save, educate our children and plan for our retirement. Those who worked for employers that had company-sponsored retirement plans with an employee match plowed as much as possible into that fund to create a retirement nest egg. For the self-employed, socking away money in a 401-K plan or traditional IRA was their retirement vehicle.
As we saved, one of our major goals was to provide a post-high school education for our children. With a bachelor’s degree being the entry level for college graduates today, many of our children opted for a graduate and sometimes doctorate degree. This came at a huge cost and sacrifice for their parents, which cut into their retirement funds.
Many of these boomer offspring college graduates found themselves with degrees that left them unemployable in their chosen field, and so they were forced to take jobs in the service sector or in other venues that paid far less than if they were able to work in the field in which they were educated. This proved to be a daunting factor for their at or near-retirement-age parents, who had paid for their education and also faced the dilemma of continuing to support their adult children – and sometimes spouses and grandchildren.
This story has been told to me countless times by my clients, and the answers are always hard to deliver. When do you cut off the financial support of your adult child? This poses a twofold situation involving both the boomers’ retirement plans, as well as when to use “tough love” with adult children. For most of us, we did not save to support two families. This cuts into our plans and resources. We all have to grow up and leave the nest at some time, but the question still looms: When?
Another consideration that parents are facing is the tax consequences of taking a distribution from their retirement plans to provide for their children. Taking a distribution will trigger a federal and state tax liability that will reduce the net amount of the distribution. This situation could force the parent to take a larger distribution in order to net a certain amount that the adult child would need. If the parent is under 591?2, he or she also faces an additional 10 percent penalty for an early distribution. My experience as a CPA is to advise my clients of these tax consequences and point out not only the tax implications, but also how it will affect their overall retirement strategy and long-range plans. I suggest that any parents who have to resort to using their retirement plans for adult children support should consult with their tax advisers before making such a move.
Each case is different. For those parents who have the resources to do both, then it becomes a personal issue between them and their children. For those who are not as fortunate as retirement time is here or approaching, a tough choice must be made: Will I continue to be the bank, or will the bank be closed?
Leo J. LaPlante has been a practicing CPA in Maine since 1969. His office is in South Portland, and he can be reached at 899-3939, or email firstname.lastname@example.org.