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Suze Orman’s main rule for parents and grandparents tempted to bankroll a child’s new business: don’t “offer financial assistance unless you are 100% sure you can afford to give that money.” (1)
In a Sept. 17 post on her blog, she added that “a gift (or even a loan) needs to be generous to the giver as well as the recipient.” That means not “reducing your retirement contributions or bypassing other important goals, such as long-term care insurance.” (1)
She’s right. I’ve been a CPA since 1981, and I’ll go a step further. Raiding a retirement account to fund someone else’s dream doesn’t just put your future at risk. It hands the IRS a big piece of the money before your kid ever sees it.
Pull money from a 401(k), IRA or similar plan before age 59½, and you’ll generally owe a 10% additional tax on the taxable part, on top of regular income tax. (2)
And the odds aren’t great. Of the private-sector establishments that opened in the year ending March 2019, only 51.5% were still around five years later, according to Bureau of Labor Statistics data. (3)
Here are five things I’d want any parent to know before writing that check.
1. Cashing out costs far more than the number on the check
Here’s an illustration. Say you’re 57, in the 22% federal tax bracket, and you pull $50,000 from a traditional IRA to help your son open a shop.
Assuming the whole withdrawal is taxed at 22%, federal income tax takes $11,000. The 10% additional tax takes another $5,000. That’s $16,000 gone before any state tax, leaving about $34,000 for the business. (2)
And that’s not the whole cost. Money you pull out is no longer growing for your retirement.
2. Assume you may never see the money again
That BLS figure bears repeating: roughly half of new establishments don’t make it five years. (3) That’s not a knock on your kid. It’s how new businesses work.
That’s why Orman’s 100% rule is the right one. And her advice for the would-be entrepreneurs is just as blunt: “Don’t cash out your retirement savings.” “Starting a business is risky enough,” she writes. (1)
If you’re not sure what you can spare, get someone who isn’t emotionally invested to run the numbers with you.
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3. Know the IRS rules for gifts and family loans
For 2026, the annual gift tax exclusion is $19,000 per recipient, and each spouse gets that exclusion. (4)
Go bigger, and gifts get reported on IRS Form 709. (5) But with a 2026 basic exclusion amount of $15 million, in my view very few families will ever actually owe gift tax. (4)
Loans have their own wrinkle. Under federal tax law, a below-market loan is one that charges no interest, or interest below the applicable federal rate.
On an interest-free family loan, the interest you didn’t charge can be treated as a gift. There’s an exception for loans of $10,000 or less between individuals, but it doesn’t apply to money used to buy or carry income-producing assets, which can include a business. (6)
My advice: if it’s a loan, put it in writing, charge at least the applicable federal rate and keep a payment schedule. If it’s a gift, call it a gift.
Quick aside — most internet financial advice comes from people who weren’t alive during the last recession. I’ve been writing about money for more than 35 years. Want rock-solid advice? Sign up for the free Money Talks Newsletter. Takes 10 seconds. No fluff. No spam.
4. Protect your own safety net first
Orman makes a point many parents skip. She writes that “Giving a child or grandchild money that comes out of your emergency savings is not generous to you.” (1)
That’s not selfish. If you run short in your 80s, the bill could land right back on the same kid you were trying to help.
And the risk is real. Someone turning 65 today has almost a 70% chance of needing some type of long-term care, according to the federal Administration for Community Living. (7)
Medicare doesn’t cover custodial care — the day-to-day help with things like bathing and dressing — which can leave families facing six-figure bills that eat into retirement savings.
Long-term care insurance helps fill that gap, covering services like home care, assisted living, and help with daily tasks. Rates are typically lowest if you buy in your 50s or early 60s, and couples often qualify for discounts. See a list of the best LTC insurance companies — takes 2 minutes.
5. Put it in your estate plan so siblings don’t fight later
Here’s what parents often forget when they’re excited for a son or daughter: the other kids.
If you hand one child $50,000 for a business, decide now whether that’s an advance on their inheritance or a gift on top of it. Then write it down. Unwritten family money is one way siblings end up not speaking at the funeral.
Without a plan, courts decide everything, probate drags on for months, and loved ones are left guessing. A will locks in exactly who gets what — you can get one in minutes for $199. A trust goes further, controlling how and when heirs inherit. You can get one starting at just $499.
My honest take
Helping your kids chase a dream is one of the best things money can do. I’m with Suze Orman on how to do it: from money you can truly spare, never from the account that’s supposed to carry you through your last 20 or 30 years.
Help in a way that leaves both of you standing if the shop doesn’t make it.
Sources: 1. Suze Orman; 2. IRS; 3. U.S. Bureau of Labor Statistics; 4. IRS; 5. IRS; 6. Cornell Law School Legal Information Institute; 7. Administration for Community Living
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