Empowering Your High School Graduate: Essential Steps for Financial and Medical Preparedness

By: David B. Lloyd CFP®, CTFA and Rachel R. Van Den Berg, Master’s in Taxation

As your child leaves home for college, equipping them with more than just textbooks and dorm essentials is important. While they may be eager to embrace newfound independence, parents should ensure they have legal and financial safeguards in place. From ensuring power of attorney documents for health care and finances are in place to teaching budgeting skills and encouraging long-term financial planning, here's how to empower your college freshman for success.

Power of Attorney Documents: Protecting Their Interests

When it comes to legal matters, three essential documents to consider are financial power of attorney, medical power of attorney, and HIPAA authorization.

• Financial Power of Attorney: Once your child turns 18, they are legally considered adults, and parents no longer have automatic access to their financial information. A financial power of attorney allows you to make financial decisions on behalf of your child in case they are unable to do so themselves. For instance, if your child is studying abroad and needs you to manage their bank account or sign a lease on their behalf, a financial power of attorney would enable you to do so.
• Medical Power of Attorney: Similarly, a medical power of attorney allows you to make medical decisions on behalf of your child in case of emergencies. 
• HIPAA Authorization: A HIPAA Authorization form grants chosen financial and medical decision-makers access to medical records and healthcare information. For instance, if your child is hospitalized, having a signed HIPAA Authorization form allows you to discuss their condition with healthcare providers and make informed decisions about their care. Without this authorization, medical information may be restricted, hindering your ability to advocate for your child's well-being effectively. Ensure your child provides you with HIPAA authorization, granting you access to their medical information, even if you're not making direct medical decisions.

These documents are invaluable during times of crisis and may ensure that you can act swiftly and effectively in your child's best interests, safeguarding their health and well-being.

Teaching Budgeting: Building Financial Responsibility

College presents an ideal opportunity to instill budgeting skills and financial responsibility in your child. Consider providing them with a stipend for living expenses and allowing them to manage their budget independently. 

Assist them in creating a budget that encompasses essential expenses like tuition, housing, food, transportation, and entertainment. Encourage consistent tracking of their spending and making informed financial decisions. 

Empowering them with control over their finances fosters crucial money management skills essential for their lifelong financial well-being.

Opening a Roth IRA: Investing in Their Future

Roth IRAs are a potentially advantageous financial tool for young adults. 

1. Unlike traditional IRAs, Roth IRA contributions are made with after-tax dollars, meaning withdrawals in retirement are tax-free, unlike traditional IRA withdrawals, which are taxed.
2. Young adults typically have lower incomes, placing them in lower tax brackets. By paying taxes on contributions now, they can potentially avoid higher taxes on withdrawals in retirement when their income and tax bracket may be higher.
3. The power of compound growth is especially beneficial for young adults due to their longer time horizon. Contributions made early on have decades to grow and compound, likely resulting in substantial tax-free gains by retirement. This long-term growth potential can significantly boost retirement savings, providing young adults with a robust start on their financial journey.

Investing early and consistently may significantly enhance your child's financial future. For example, in the table below, you can see that by investing just $416.67 per month (equivalent to $5,000 annually) for 30 to 40 years, your 18 to 25-year-old child could potentially become a millionaire by their 60s. Utilizing a Roth IRA further amplifies this strategy's power, as all earnings grow tax-free, offering a substantial advantage over the long term.

Utilizing 529 Plans

Having a 529 plan provides a valuable tool for financing your child's education. These plans offer tax-free withdrawals for qualifying education expenses, including tuition, room and board, books, supplies, and equipment necessary for enrollment or attendance at an eligible educational institution. Certain technology expenses essential for education, such as a laptop or software, are also considered qualified expenses.

Moreover, if your child receives a scholarship, you can withdraw an amount equal to the scholarship without incurring the usual 10% penalty on non-qualified withdrawals. However, keep in mind that you will still owe income tax on the earnings portion of the withdrawal.

Conclusion

Navigating the transition from high school to college is a pivotal time for parents and students. At Century Management, we recognize the significance of this transition and are here to help. Our team can facilitate budgeting conversations to promote financial responsibility, provide valuable advice and management on Roth IRA contributions and investments, and help you facilitate legal matters by establishing essential legal safeguards with an attorney. Give us a call today!

Century Management ("CM") is an independently registered investment adviser with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. CM is also registered as a Portfolio Manager in the Province of Ontario. A full description of our Firm’s business practices, including our Firm’s investment management services, wealth plans and advisory fees, is supplied in our Form ADV Part 2A and/or Form CRS, which is available upon request and also at www.centman.com.

This information is educational in nature and does not constitute investment advice. Past performance is not indicative of future results. Forward-looking statements are not guaranteed. All investments involve risk and unless otherwise stated are not guaranteed. CM does not provide legal or tax advice and the information herein should not be considered legal or tax advice. CM-2024-04-24