Will New Tariffs and Tax Rules Cost You? (Plus: Travel Rewards & Roth IRA Tips)

Summary

NerdWallet's Smart Money Podcast: Episode Summary – "Will New Tariffs and Tax Rules Cost You? (Plus: Travel Rewards & Roth IRA Tips)"

Release Date: February 6, 2025

NerdWallet’s trusted finance experts delve into the latest financial news and answer listener questions to empower you with actionable advice for smarter money management.

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I. Financial News Roundup

A. Trump Administration's Tariff Actions

The episode kicks off with hosts Sean Pyles and Elizabeth Ayola discussing the recent surge in financial news dominated by the Trump administration's actions. They introduce Ana Helhoski, a news correspondent, to break down the complexities of new tariffs affecting the U.S. economy.

• Implementation of Tariffs: President Trump has enacted a 10% tariff on all goods from China as of February 6, 2025. Additionally, 25% tariffs on goods from Mexico and Canada (excluding energy exports, which are subject to a 10% tariff) were announced but delayed by a month for implementation (01:32).

• Rationale Behind Tariffs: Trump cites the tariffs as punitive measures against countries like Canada, Mexico, and China for issues like the influx of fentanyl and undocumented immigrants. He also aims to revitalize U.S. manufacturing, though the effectiveness of these measures remains uncertain (02:12).

• Retaliatory Measures: In response, China has imposed a 15% tariff on certain natural gas products and a 10% tariff on approximately 80 products, including crude oil and agricultural machinery. Canada has also announced reciprocal tariffs, with Prime Minister Justin Trudeau imposing a 25% tariff on billions of dollars of American goods (03:12).

• Impact on Consumers: Ana emphasizes that tariffs generally lead to higher consumer prices, affecting goods from the targeted countries. Additionally, even products made in the U.S., which often rely on imported parts, may become more expensive (02:08; 03:16).

B. Federal Spending Pause

Elizabeth and Sean shift focus to the federal spending pause initiated by the Office of Management and Budget on January 27. This pause halted all federal spending grants and financial assistance programs, excluding exceptions like Medicare, Social Security, food assistance, and student loans.

• Legal Challenges and Current Status: The spending pause has faced significant legal scrutiny, with federal judges in D.C. and Rhode Island issuing temporary restraining orders to block the freeze. The White House has rescinded the original order, but confusion persists as conflicting statements emerge (04:04; 05:13).

• Uncertainty for Federal Programs: The constitutional authority for Congress to fund programs adds another layer of complexity, leaving the future of numerous federal funding programs in limbo (04:33).

C. Department of Government Efficiency (DOGE) and Security Concerns

A particularly alarming topic discussed is the recent establishment of the Department of Government Efficiency (DOGE), purportedly led by Elon Musk.

• Actions by DOGE: Contrary to expectations of an advisory role, DOGE has been actively seizing information, dismantling departments, and firing federal employees. Notably, Musk was granted access to the Treasury Department's federal payment system, which handles $6 trillion in federal payments, including Social Security, Medicare benefits, tax refunds, and payments to government contractors (05:38; 06:05).

• Consumer Impact: This unprecedented access raises significant privacy and security concerns, as Musk and his associates can potentially access and alter personal information and federal payments. Affected individuals are advised to freeze their credit to protect against potential scams (06:26; 06:42).

D. Changes to the Consumer Financial Protection Bureau (CFPB) and Education Department

The episode also covers the instability within the Consumer Financial Protection Bureau (CFPB) following the firing of Director Rohit Chopra. Scott Besant has been appointed as the Acting Director, who swiftly halted the agency's operations to align with the new administration's directives (07:20; 07:45).

• Threats to the Education Department: There are ongoing discussions about dismantling the U.S. Department of Education, a move that would significantly impact federal education policies, financial aid, and student loan management. While complete dissolution requires Congressional approval, there are indications that DOGE may attempt to reduce the department's power by reallocating responsibilities to other agencies or state governments (08:20; 08:39).

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II. Listener Questions Segment

After the news roundup, hosts transition to answering listener questions, providing expert advice on various personal finance topics.

A. Favorite Travel Credit Cards

Listener inquiries about the best travel credit cards are addressed by Sarah Rathner and Sean Pyles.

• Sarah’s Recommendation – Chase Sapphire Reserve: Sarah highlights the Chase Sapphire Reserve as her preferred travel card, praising its Chase Ultimate Rewards Points system, which offers 1.5 cents per point when redeemed for travel through Chase. The card also includes a $300 annual travel credit, airport lounge access, and comprehensive travel insurance. However, it comes with a $550 annual fee, necessitating careful consideration of usage to justify the cost (12:40; 14:32).

  "The Chase Sapphire Reserve has an annual fee of $550, which is nothing to sneeze at. You definitely want to think long and hard about how you're going to use this card before you apply." — Sean Pyles 14:19

• Sean’s Preference – American Express Gold Card: Sean favors the American Express Gold Card for its robust rewards on dining and travel-related perks like baggage insurance and Uber credits. Although he prefers using a cashback card generally, the Amex Gold stands out for its rewarding structure and premium benefits, albeit with a high annual fee (15:31; 16:31).

• Advice on Choosing Travel Cards: Sarah advises listeners to assess their travel frequency, preferences (e.g., specific airlines or hotel chains), and the value of card benefits versus annual fees. She emphasizes that travel cards are most beneficial for frequent and international travelers (17:01).

  "If you currently have credit card debt, know that the amount that you pay in interest can wipe out the value of your travel rewards pretty quickly." — Sean Pyles 17:59

B. Opening Investment Accounts for Grandchildren

Cheryl's query about opening investment accounts for grandchildren is thoroughly explored.

• Options Discussed:

  • 529 College Savings Plans: Ideal for education-related expenses, offering tax-free growth when funds are used for qualified educational purposes (18:15).

  • UTMA Accounts: These custodial accounts allow minors to own assets, but come with considerations like potential impact on student aid eligibility and tax implications on earnings (18:44; 21:56).

  • Taxable Brokerage Accounts: Allow greater flexibility for non-education-related use but involve long-term capital gains taxes and gift tax considerations. In 2025, individuals can gift up to $19,000 per person without triggering gift tax (22:03; 23:01).

• Key Recommendations:

  • Consult with a Tax Professional: Given the complexities surrounding tax implications and eligibility for financial aid, professional advice is essential (23:25).

  • Coordinate with Parents or Guardians: Ensure alignment with the grandchildren's current financial arrangements and existing accounts (19:35).

C. How to Open and Use a Roth IRA

A listener's detailed question about opening a Roth IRA is answered in an engaging, fairy-tale style by Sarah Rathner.

• Step-by-Step Guide:

  1. Eligibility (“The Key”): Ensure you have earned income and meet the income limits. For 2025, the maximum contribution is $7,000 for individuals under 50 and $8,000 for those 50 or older. Contribution limits begin to phase out at higher income levels (24:19; 26:17).

  2. Choosing a Roth IRA Provider (“Selecting the Bowl”): Decide between a brokerage account for investment flexibility or a Robo Advisor for a hands-off approach. NerdWallet offers a roundup of the best Roth IRA accounts to help make this decision (26:43; 26:57).

  3. Funding the Account (“Adding Porridge”): Determine your contribution strategy, whether it's monthly deposits or an annual lump sum (27:24).

  4. Investing the Funds (“Activation”): Select your investments to ensure the funds grow over time, transforming your contributions into substantial retirement savings (27:36; 28:19).

• Key Takeaways:

  • Flexibility vs. Guidance: Choose between managing investments yourself or opting for automated investment services based on your comfort level.

  • Tax Advantages: Contributions are made with after-tax dollars, allowing tax-free growth and withdrawals in retirement.

  • Long-Term Growth: Consistent contributions and wise investment choices can significantly enhance retirement savings over time (28:25).

  "If you don't do that, then the money you put into a Roth IRA account is just held in cash. That's your uncooked porridge just sitting in the bowl instead of some hunky prince." — Sarah Rathner 27:17

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III. Conclusion

Sean and Sarah encourage listeners to continue sending in their money questions for future episodes, emphasizing nerd-led support for all personal finance inquiries. They provide contact information for submissions and remind listeners to follow the podcast on various platforms for the latest episodes and financial insights.

"Until next time, turn to the Nerds." — Sean Pyles and Sarah Rathner 29:22

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Notable Quotes with Timestamps

• Elizabeth Ayola [00:04]: "It's dizzying trying to keep up with everything that's happening right now with the new administration, and some of it could affect all of our finances."

• Ana Helhoski [02:08]: "Tariffs usually end up costing consumers more money."

• Ana Helhoski [06:05]: "Musk, who is neither an elected official or an appointee approved by Congress, can access everyone's personal information."

• Sean Pyles [17:59]: "If you currently have credit card debt, know that the amount that you pay in interest can wipe out the value of your travel rewards pretty quickly."

• Sarah Rathner [27:17]: "If you don't do that, then the money you put into a Roth IRA account is just held in cash. That's your uncooked porridge just sitting in the bowl instead of some hunky prince."

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Resources Mentioned

• NerdWallet’s Roundups: For the latest recommendations on travel credit cards and Roth IRA accounts, visit NerdWallet’s website.

• Contact Information:

  • Voicemail/Text: 901-730-6373 (901-730-NERD)
  • Email: [e-mail]

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This summary encapsulates the key discussions, insights, and advice shared during the episode, providing a comprehensive overview for those who couldn't listen live.

Transcript

[Sean Pyles]

Well, Elizabeth, would you say it's been a slow news week?

[Elizabeth Ayola]

I would not say that, Sean, not even remotely. In fact, it's dizzying trying to keep up with everything that's happening right now with the new administration, and some of it could affect all of our finances.

[Sean Pyles]

So let's try to summarize and then get to the fun part. A lightning round of listener questions. Welcome to NerdWallet's Smart Money podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Pyles.

[Elizabeth Ayola]

And I'm Elizabeth Ayola.

[Sean Pyles]

This episode, we're featuring a speed round of your questions, including favorite travel credit cards and how exactly to open a Roth ira, a question for which we turn to fairytales. But first, our weekly Money news roundup, where we break down the latest in the world of finance to help you be smarter with your money.

[Elizabeth Ayola]

So, Sean, as we just mentioned, the news in the last couple of weeks has been a lot.

[Sean Pyles]

Yeah, Elizabeth, I'd describe it as unprecedented, to say the least, but also chaotic and confusing.

[Elizabeth Ayola]

So let's try to clear up as much as we can. Today, we're breaking down some of the key recent actions by the Trump administration that could affect your finances and the economy. Our news colleague, Ana Helhoski is here to help with that. Anna, thanks for stopping by.

[Ana Helhoski]

Yeah, you got it.

[Elizabeth Ayola]

All right, so let's start with tariffs, a topic we've talked about on the podcast in the past, but more hypothetically now. It seems this tariff business is starting to become a reality.

[Ana Helhoski]

Yeah, that's right. So President Trump has made a number of tariff promises, but only one has come to fruition so far. As of Tuesday, There is a 10% tariff on all goods from China. Now, there are existing tariffs on certain products from China, but this is an across the board tariff. And there's two other tariffs that Trump announced that have been delayed. Those were much bigger. 25% on all goods from Mexico, 25% on all goods from Canada, except for energy exports, which would have a 10% tariff. Now, those were supposed to go into effect on February 4, but implementation will be delayed for a month.

[Sean Pyles]

So what's the rationale behind the tariffs? Why is this a priority for Trump?

[Ana Helhoski]

Trump has cited a few reasons for his tariffs. First off, they're punitive. He. He blames Canada and Mexico and to a lesser extent China for the influx of fentanyl and undocumented immigrants into the country. He also says he wants to bring US Manufacturing back home, but Whether or not the tariffs lead to that kind of change is uncertain.

[Elizabeth Ayola]

I also want to put it out there that tariffs placed on one country often lead to retaliatory tariffs in response. And that's what we saw this week, too.

[Ana Helhoski]

Yeah. China is enacting tariffs on the U.S. including a 15% tariff on certain natural gas products and a 10% tariff on about 80 different products, including crude oil, agricultural machinery, and large engine car imports. And before the Canadian tariffs were paused, Prime Minister Justin Trudeau had announced 25% tariffs on billions of dollars of American goods. Now, Trump has floated a number of other tariff plans on specific products, including steel, pharmaceuticals, copper, aluminum, computer chips, and semiconductors.

[Sean Pyles]

With more tariffs likely to come, what's the takeaway for consumers?

[Ana Helhoski]

All in all, tariffs usually end up costing consumers more money. That means consumers will likely see higher prices on goods from China, and that'll extend to products from Mexico and Canada if those tariffs are enacted. And here's one other thing that I want to point out. Products made in the US Quite often require parts produced in other countries, like cars. So even prices of made in USA goods could get more expensive for Americans.

[Elizabeth Ayola]

All right, so another big topic in the headlines lately is the federal spending pause. Or should I say the federal spending pause. Pause, pause.

[Ana Helhoski]

Yeah. This is a particularly confusing one, but I'll try and give it a go. So let's go back to January 27, when the office of Management and Budget called for a pause of all federal spending grants and other financial assistance programs.

[Sean Pyles]

Yeah. What did that pause include?

[Ana Helhoski]

So that was the problem, really. There were some apparent exceptions. Medicare, Social Security, food assistance, and student loans. But it was completely unclear what would happen to other federal funding programs, including Medicaid. Suffice to say, the order produced a lot of chaos. Fundamentally, it isn't clear whether the memo was legal, since the Constitution gives Congress the power to fund programs, and each year after it approves spending, funding for those programs are made legal obligations.

[Elizabeth Ayola]

So then what was the response, Ana?

[Ana Helhoski]

Well, the next day, a federal judge in D.C. granted an administrative stay that blocked the spending freeze for a few days. Then on January 29th, the White House issued a memo rescinding the original order, which would have wrapped up this debacle until White House press secretary Carolyn Levitt posted that the funding freeze was still in place. So here's where things stand. Last Friday, a federal judge in Rhode island granted a temporary restraining order blocking the pause. And then a similar restraining order was made by the D.C. judge. So to sum it all up, Trump's Federal spending pause is paused while we wait for the legal system to work this thing out one way or the other.

[Sean Pyles]

Okay, well, let's turn to a few actions by Trump's so called Department of Government Efficiency, or doge. It's led by Elon Musk, the literal richest man on the planet and an unelected official. I'd like to note that DOGE is not an actual government department. It is a department in name only. And we all expected it to serve in an advisory capacity, but that doesn't seem to be the case.

[Ana Helhoski]

Yeah, in the last week, DOGE has seized information, begun dismantling departments, and fired federal employees. But there was one particular action that might especially concern Americans. On Friday, Musk was given access to the Treasury Department's federal payment System, which makes $6 trillion in federal payments to Americans. And I'll note that those payments are approved by Congress.

[Elizabeth Ayola]

So those payments would include things like Social Security and Medicare benefits.

[Ana Helhoski]

Yeah, as well as tax refunds, payments to federal employees, payments to government contractors, and so on in the process. A career treasury official who oversaw the system was even placed on administrative leave after he refused to let Musk's associates access the system. And by the way, that system holds a ton of personal information on millions of Americans.

[Sean Pyles]

So what does that actually mean for people?

[Ana Helhoski]

Well, it means that Musk, who is neither an elected official or an appointee approved by Congress, can access everyone's personal information. And beyond that, the concern is if DOGE can now block or change payments.

[Elizabeth Ayola]

So since we don't know what could happen, if anything, to that personal information now that DOGE has access, we can't give specific advice on what to do next. But what we can say is that we recommend freezing your credit in general because it blocks scammers from accessing your credit reports and also opening fraudulent accounts.

[Sean Pyles]

Yeah, we have more information on how to freeze your credit at the NerdWallet website. Just search NerdWallet. How to freeze your credit beyond the Treasury. It seems like the Trump administration has been pretty busy with other departments, too.

[Ana Helhoski]

On the last day of January, CFPB Director Rohit Chopra was fired and Scott Besant, who is the new Treasury Secretary, was named Acting Director.

[Elizabeth Ayola]

For those who don't know, the CFPB is an independent agency that oversees the consumer finance industry. So that includes banks, lenders, and other financial institutions. Its main job is, as the name suggests, to protect consumers, often through enforcement actions. Over the last 13 years, the CFPB has recouped 19.7 billion billion for consumers.

[Ana Helhoski]

Well, it seems that, unfortunately, the CFPB is not going to get much done anytime soon. Shortly after Besant was appointed, he quickly halted operations at the agency, saying the CFPB needed to align its actions with the new administration.

[Sean Pyles]

This wasn't entirely unexpected, of course. Trump, as well as Musk are no fans of the cfpb. They also don't seem to be fans of the Education Department.

[Ana Helhoski]

Yeah, that's an understatement, Sean. After dismantling the U.S. agency for International Development, or USAID, and purging other departments, it looks like the U.S. department of Education could be next.

[Elizabeth Ayola]

And the Education Department is in charge of overseeing all federal education policy, along with managing financial aid and student loans. So it has a laundry list of duties. And yet.

[Ana Helhoski]

And yet, Trump has long promised to get rid of the Education Department, and now there are reports that he may soon issue an executive order to dismantle it.

[Sean Pyles]

Can he do that, Ana?

[Ana Helhoski]

I mean, getting rid of the department entirely isn't up to a president. That power lies with Congress. Then again, Doge has shuttered usaid, so is it possible? Maybe. I would note that Doge has reportedly already gained access to internal ed systems, including people's financial aid information. So there's more personal information that Musk has access to.

[Elizabeth Ayola]

Another good opportunity to repeat our House view on freezing credit. So, Ana, if Trump doesn't get rid of the Education Department, he could still dwindle its power, right?

[Ana Helhoski]

Yeah, that's right. He could still fire more employees and divert department responsibilities, both financial and practical, to other federal agencies and probably to the States.

[Sean Pyles]

All right, that was a lot of information to digest, and there's likely to be a lot of new actions coming out of the White House in the coming days. So, listener, let us know what you have questions about. In the meantime, Ana, thanks for walking us through all of that.

[Ana Helhoski]

Yeah, sure thing.

[Elizabeth Ayola]

Up next, Sean and Sarah Rathner answer not one, not two, but three listener questions about travel, credit cards, opening investment accounts for grandkids, and more.

[Sean Pyles]

But before we move on, a quick note, Listener, I'm betting you have a pile of tax documents burning a hole in your desk right now, and maybe you're wondering how to approach your taxes this year. Well, we are putting together an episode all about your tax questions, so send them our way. Leave us a voicemail or text us on the Nerd hotline at 901-730-6373. That's 901-730-N E R D. Or email us at podcastwallet.com maybe you're wondering if.

[Elizabeth Ayola]

You should itemize or claim the standard deduction or if there will even be an IRS to send your tax return to. Whatever your tax question, send it our way one more time. Leave us a voicemail or text us on the Nerd Hotline at 901-730-6373. That's 901730, nerd. You can also email [e-mail] all right.

[Sean Pyles]

Now let's move on to this episode's Money Question segment that's coming up in a moment. Stay with us.

[Sarah Rathner]

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[Sean Pyles]

Back and answering your money questions to help you make smarter financial decisions. This episode, we're taking on a number of your questions in a lightning round. Here's the first question, which comes from a listener's text message. They asked, what's your favorite travel credit card? So, okay, a simple enough question. But before we dive in, I just want to give listeners a heads up that we will be talking about some companies that are NerdWallet partners, but that does not influence how we talk about them. As ever. And as we talk about specific benefits of each card, know that terms and conditions apply and the benefits that we'll discuss are active as of this recording and may change at a later date. Okay, with all of that said, Sarah, lay it on us. What is your favorite travel credit card?

[Sarah Rathner]

Is this what it's like to admit to yourself that you actually like one of your kids best of all?

[Sean Pyles]

I would imagine so, having not any Kids of my own.

[Sarah Rathner]

Well, I only have one kid, so I like him best of all. But I do have three pets, so maybe I could just apply that situation to this. If I had to go with just one, I would go with the Chase Sapphire Reserve. But my answer comes with an asterisk that leads to a footnote.

[Sean Pyles]

Okay. And go on about that asterisk. Footnote.

[Sarah Rathner]

So what's great about the card on its own is that it earns what are called Chase Ultimate Rewards Points. That's its rewards currency. And when you redeem those points for travel through Chase, then they're worth one and a half cents apiece. And that's a good thing, because the average value of points is typically around 1 cent a piece, so it's 50% higher. But that is also what makes the Chase Sapphire Reserve even better. When you carry multiple Chase cards that earn Chase Ultimate Rewards points. And how this works is if you have multiple Chase cards that earn this rewards currency, you can move all of those points over to your reserve card, and then you could redeem for travel at that higher rate. And if you have a spouse or partner who also carries Chase cards that earn these types of rewards, they can transfer points to you if you're carrying the reserve card, because Chase allows you to transfer points to another member of your household. So both of you can earn a whole bunch of points and then redeem them for travel through your Chase Sapphire Reserve account.

[Sean Pyles]

That is pretty sweet. And I might add my own asterisk or maybe that little dagger thing you sometimes see in publications, and that's that you have to pay a pretty hefty annual fee to be able to earn the points at this rate with the reserve card, right?

[Sarah Rathner]

Yes. So the Chase Sapphire Reserve has an annual fee of $550, which is nothing to sneeze at. You definitely want to think long and hard about how you're going to use this card before you apply, because that's a lot of money.

[Sean Pyles]

Yeah. But that said, if you can make it work, you can get a lot of value out of these cards. And I feel like the Chase Sapphire cards, whether the Reserve or the Preferred, are the gateway credit cards for a lot of people that get them into the points game. Because once you learn about transferring points, I mean, all bets are off for some folks. They get totally hooked on maximizing their points to get free or highly discounted travel. So I get why you like that card.

[Sarah Rathner]

Yeah. And it has some other benefits, too. It's got a $300 annual travel credit. Last year, I Used that to buy tickets on high speed rail on a trip to Spain with my family. So I like to think that I got a lot of joy out of that. Travel credit fun. You also get access to certain types of airport lounges. It comes with travel insurance, which can be a really helpful benefit if your trip does not go according to plan. So those are all things that could have monetary value if you choose to take advantage of them. And that can also help chip away at that once again. $550 annual fee.

[Sean Pyles]

Yeah.

[Sarah Rathner]

All right, Sean, what is your favorite travel card?

[Sean Pyles]

I think I have an easier choice here because my favorite travel credit card would have to be the only travel credit card that I currently use, which is the American Express Gold card.

[Sarah Rathner]

So you're definitely not the only nerd who's a fan of that card. And it's not just because you can get the card in classic yellow gold or trendy rose gold. And for a limited time, they had a white gold option that I don't think is available anymore.

[Sean Pyles]

Yeah, I have the yellow gold and I feel very fancy whenever I use it, even if I'm just at the Taco Bell drive thru whipping out my fancy metal card. I'm not huge into travel credit cards because I just don't want to have to play that game transferring points and I'm just kind of lazy with it. I tend to use my cash back card more than anything else, but when it comes to my travel credit card, I like it. I guess for all the reasons that folks typically like any travel credit card, I got a really sweet signup bonus. The rewards rate is nice on purchases that I make frequently, like going out to restaurants. And when it comes to travel related perks, I do really like that it has baggage insurance.

[Sarah Rathner]

Yeah. The card also offers quite a few statement credits for specific merchants like Dunkin and Rezi. And there's a monthly allotment of Uber cash that gets added to your Uber account. Terms apply. If you take advantage of these perks, you can get more value out of the card because it also has a pretty high annual fee.

[Sean Pyles]

So just because Sarah and I like these cards, listener, that doesn't mean that they would be right for you. Sarah, you've been writing about credit cards for a while now. Can you enlighten us about what someone should consider if they are hoping to find a new favorite travel credit card?

[Sarah Rathner]

The first thing you have to ask yourself is, is a travel card even right for you? And the answer might be no, and that's totally fine. Now, the more you travel each year, especially if you travel internationally, the more sense it makes to use travel rewards credit cards. But if you tend to travel domestically and not that often, you probably will get more value out of a cash back card. If you are a frequent enough traveler, then you want to look at the cost of the card compared to the dollar value of the perks that it offers that you're actually going to use. One last thing to think about is how you travel. If you're loyal to a specific airline or you always stay at a hotel property that's under the umbrella of a specific brand like Hilton, Hyatt, Marriott, Bonvoy, then airline and hotel cards could be a better fit for you. But if you want flexibility to book on any airline or stay at any hotel, even independent hotels that are not part of a chain, then a general travel rewards card might be a better option for you.

[Sean Pyles]

Okay, all good things to consider. And I'll also add, if you currently have credit card debt, know that the amount that you pay in interest can wipe out the value of your travel rewards pretty quickly. So before you apply for a high end card, focus on paying down that debt first.

[Sarah Rathner]

Now let's get to our next listener question. Totally different topic. This one comes from Cheryl, who wrote us an email. I have a question about opening investment accounts for my grandchildren. I would like to open the accounts with a small amount, say 100 plus dollars, and then contribute on birthdays and Christmas. Many of the Vanguard funds require a large investment of $3,000. Is there anywhere I can get started with smaller amounts? All right, Sean, you're Mr. CFP, so I'm going to let you start this one. What would you tell Sheryl?

[Sean Pyles]

Well, first I'm going to tell Sheryl that this is not personalized investment advice. This is just for general educational and entertainment purposes, as we always say. But then I would also tell Cheryl that your grandchildren are super lucky to have you because investing for them is a really generous gift. But first I want to back up and ask Cheryl, hypothetically, or anyone else who wants to invest for a loved one, what are they investing for? Like what do they hope their grandchildren will use this money for? Is it for college? Is it so they can have a gap year galavanting around Europe after high school or college? What this money is going to be used for can determine what kind of account might be best for them.

[Sarah Rathner]

I will also say this before you open any sort of account, talk to your grandchildren's parents or guardians, whoever is raising them day to day because they might already have Some accounts set up for their kids that you can contribute to.

[Sean Pyles]

Let's break this down by different goals. So if Sheryl wants to invest for their grandchildren's Future Education, a 529 college savings plan can be a great investment vehicle. The funds don't have to be used for college. They could be used for a trade school or other types of education like private school. When the investment money is used for qualified educational expenses, it's tax free, which is a big plus. And it's really common for folks to fund or open a 529 for relatives. In fact, I just opened one for my nephew as a Christmas gift. And like Cheryl, I'm planning to contribute to that on birthdays and for Christmas.

[Sarah Rathner]

My husband and I have a 529 for our son and we both contribute to it. Both of our sets of parents have also contributed by giving us checks. And then we deposit them into the savings account that's linked to the 529 and then we move the money over and invest it. But what if Cheryl isn't so much the 529 kind of grandparent, but is more the YOLO kind of grandparent who wants to fund their grandchildren's I don't know, experience going to like a yurt in the desert.

[Sean Pyles]

Well, if Cheryl wants to give their grandchildren money just to do whatever they want with and find themselves, there are a few options to consider. But I'm just going to focus on an UTMA account and a standard taxable brokerage account, starting with utma. UTMA is a pretty ugly sounding acronym that just means Uniform Transfers to Minors act, and it's what's known as a custodial account. There are also things called UGMA accounts, which is a similar, even uglier sounding acronym, but many people prefer utmas, so I'm just going to focus on those. So utmas are essentially ways for minors to own investment assets when they generally would be unable to do so. When the grandchild is a minor, Cheryl would manage the assets in the account and the grandchild would eventually take active ownership of the account when they're an adult. There are a couple of catches with utmas, though. Now remember that the child is considered to own the assets in these accounts. That means they would be considered the child for student aid purposes, which could mean that they could qualify for less assistance. The second is that the child could be responsible for taxes on growth within the account. And I don't want to go too far down the tax rabbit hole here, but depending on how much the account earns in a year. The child's earnings could be taxed at their parents marginal tax rate, which a lot of folks want to avoid.

[Sarah Rathner]

Yeah, whew. That is a lot to consider. So would it be simpler to go with a taxable brokerage account then?

[Sean Pyles]

Yes and no. So remember that minors aren't generally allowed to own investments or taxable brokerage accounts unless it's in something like an utma. If Sheryl wants to pursue the taxable brokerage account route for their investments with her grandchildren, but avoid the sticky student aid and tax stuff that I mentioned earlier, they could just open one of these accounts for each of their grandchildren, make contributions, and then gift the grandchild the money from that account when they want to.

[Sarah Rathner]

Yeah, but I'm going to go ahead and assume that there is some sort of tax hang up here too.

[Sean Pyles]

You are correct Sarah, because there is no escaping taxes in this case. Sheryl would likely have to pay long term capital gains on the earnings in their brokerage account if they hold the investments for more than a year. But the grandchildren wouldn't owe any taxes on the money they get, which is nice. And people often worry about having to pay gift tax, but for many folks that's not really a concern. In 2025, people can gift $19,000 per person without having to file a gift tax return.

[Sarah Rathner]

Well, those are all things to plan for. And it sounds like anybody in Cheryl's situation who wants to gift money to grandchildren for their future, their young adulthood, it might be worth talking to some kind of tax professional first before you take any actions. And again, talk to the parents too. All right, Another thing they asked us about is account minimums. Do they have to start with a minimum investment of $3,000 or is there a way they can start with smaller amounts?

[Sean Pyles]

Sheryl should certainly be able to start with smaller amounts, depending on what type of account they want. Sheryl should have no problem finding an investment account with a $0 minimum.

[Sarah Rathner]

Yeah, and this is where we put our NerdWallet hats on. Not that we ever take them off and remind folks to shop around for financial products. We have loads of roundups about investing accounts on NerdWallet, so check those out. You can find a link in this episode's show notes or online by searching NerdWallet investing account.

[Sean Pyles]

And moving on, let's get to our final question of the episode, which comes from a listener's text message. Here it is step by step, like I'm a five year old. Exactly how do you open a Roth Ira. And then what do you do once you open it? I'm college educated, but I need finances for dummies. All right, Sarah, you are a parent. I get that your kid is not yet 5, but how would you explain to them how to open a Roth ira?

[Sarah Rathner]

Honestly? Ask me that question in a few years when he no longer refers to our dog as Mama.

[Sean Pyles]

I'm also Mama, but the dog is double mama.

[Sarah Rathner]

Whenever I say the dog's name to him, he goes mama.

[Sean Pyles]

So cute. Cute.

[Sarah Rathner]

So opening a Roth IRA is pretty simple. You can do it in just a few steps, which we laid out in an article that we will link to in the show notes, but I will also walk you through them.

[Sean Pyles]

Give them to us. And Sarah, you gotta make this fun because I was that five year old who preferred to doodle with my crayons in class rather than pay attention.

[Sarah Rathner]

All right, gather round, kids, because it's story time. Imagine that a Roth IRA is a house deep in the woods, and it's like made of candy or something just to make things really interesting. And you are a lost child. You're getting kind of hungry, you want shelter, you want a snack. And in this Roth IRA house, you can have both at the same time. And of course, we would like a fully funded retirement, which I will somehow work into this metaphor eventually. I'm not yet sure how, but stick with me, okay?

[Sean Pyles]

I'm confident you can get there. Okay, Sarah, I'm picturing a house. How do I get into it? Because I want a retirement full of money and candy.

[Sarah Rathner]

So the Roth IRA candy house has a locked door. The first step is knowing if you have the right size key. In this case, the key represents your income. So if the income is too little and the key is too small, can't enter, but too much, you can't enter either. The key won't fit because it's too big. It needs to be just the right size. So to put funds into a Roth ira, you need to have earned income. That income is something that you get from a job that for which you are a W2 employee, maybe a contracting gig. You're a 1099 employee, and your income has to be below certain limits. And for a Single Person In 2025, you have to earn less than $150,000 to be able to contribute the maximum amount to a Roth ira. That amount that you can contribute is phased out as your income goes above that limit. So as a single person, you can't contribute at all if you earn more than $165,000 in 2025.

[Sean Pyles]

Okay, so your income is the key to entering this candy house. And the size of your key, AKA how much income you have, determines kind of how big the house is when you get inside, as in how much you can contribute.

[Sarah Rathner]

And the maximum amount you can contribute to a Roth IRA in 2025 is $7,000 for those under the age of 50. And for those who are age 50 or older, the max contribution is $8,000.

[Sean Pyles]

So I'm in the house now what?

[Sarah Rathner]

All right, so you go into the house and you see a wall stacked with shelves full of bowls. So these bowls are different Roth IRA accounts, and you can choose from different companies. Some bowls are different shapes and sizes and some have different features.

[Sean Pyles]

How do I know which one to pick?

[Sarah Rathner]

Well, in a non made up fairy tale world, you would check out NerdWallet's roundup of the best Roth IRA accounts to help you choose which one is right for you. But if you want to choose your own investments, you might select the brokerage account. Bowl of porridge. If you want to be more hands off with your investments, you might select the Robo Advisor bowl of porridge.

[Sean Pyles]

Okay, I will have the robo porridge, please, because I like to be a passive investor. I've got my bowl selected. What's next, Sarah?

[Sarah Rathner]

Next up, you choose how much money you'll put into the account, which, let's say is the amount of porridge you want to add to your bowl. You might want to add a certain amount each month or do it all at once for the year. You have some flexibility here.

[Sean Pyles]

So I'm in the house. I've got my bowl. I'm gradually adding some porridge to it. Does it somehow transform into a handsome prince that will provide me with money and candy in retirement?

[Sarah Rathner]

You know, it kind of does, because the next and final step is the most magical of all. You pick your investments, and this is a big one, because the money you put into a Roth IRA is not automatically invested. So think of choosing your investments as bringing the whole magical dish to life. Because if you don't do that, then the money you put into a Roth IRA account is just held in cash. That's your uncooked porridge just sitting in the bowl instead of some hunky prince. Then you sit back, continue to invest, and watch your retirement funds grow over time until you have the largest bowl of porridge that anyone has ever seen.

[Sean Pyles]

Well, that's one way to live happily ever after. And hopefully this story helped the listener understand how to open a Roth Ira.

[Sarah Rathner]

Well, now I just want a bowl full of candy porridge. All right, that's all we have for this episode. Remember, listener, we're here to answer your money questions and we could do it via fairy tale if needed or not. So turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730 N E R D. You can also email [e-mail] also visit nerdwallet.com podcast for more info on this episode. And remember, you can follow the show on your favorite podcast app, including Spotify, Apple Podcasts and iHeartRadio to automatically download new episodes.

[Sean Pyles]

And here is our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general education, educational and entertainment purposes and may not apply to your specific circumstances.

[Sarah Rathner]

And with that said, until next time, turn to the Nerds.

[Unknown]

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