Create Tax Savings And Transfer Wealth To Your Child With A Roth Ira

Create Tax Savings And Transfer Wealth To Your Child With A Roth Ira



Create Tax Savings and Transfer Wealth to​ Your Child With a​ Roth IRA
Parents must give serious thought to​ protecting their family through estate tax planning. While life insurance and trusts should be a​ part of​ every plan,​ Roth IRAs can be a​ simple tool for passing money to​ your child on​ a​ taxfree basis.
Roth IRA
First,​ we need a​ quick summary of​ the​ Roth IRA. a​ Roth IRA is​ an aftertax retirement vehicle that produces huge tax savings because all tax distributions are taxfree. That statement can a​ bit confusing,​ so lets break it​ down. the​ downside of​ a​ Roth IRA is​ the​ fact that contributions are not tax deductible as​ with traditional IRAs or​ 401ks. the​ upside of​ a​ Roth IRA,​ however,​ is​ that all distributions are taxfree once the​ person reaches the​ age of​ 59½. So how can you​ use a​ Roth IRA to​ pass money to​ your child?
Opening a​ Roth IRA For Your Child
One of​ the​ biggest keys to​ retirement planning is​ time. the​ more years you​ spend saving money for retirement,​ the​ more you​ should have when that blessed day arrives. Imagine if​ you​ had started saving for retirement when you​ were 16. How much bigger would your retirement nest egg be? What if​ you​ purchased Microsoft stock in​ 1990 and watched it​ split eight times? Okay,​ that was painful example if​ you​ missed that opportunity. Nonetheless,​ why not do for your child what you​ didn’t do for yourself?
The fundamental goal of​ estate planning is​ to​ pass as​ much of​ your estate as​ possible to​ your family on​ a​ taxfree basis. you​ can transfer relatively small amounts of​ money to​ your child now. if​ you​ have a​ 16 yearold child with a​ Roth IRA,​ you​ can contribute $4,​000 in​ 2018. That $4,​000 is​ going to​ grow taxfree for 43 years and be worth quite a​ bit. a​ ten percent return would result in​ the​ account growing to​ roughly $200,​000 and the​ full amount would be distributed taxfree. There are other practical advantages to​ opening a​ Roth IRA for your child.
As a​ parent,​ it​ is​ vital that you​ teach your child the​ value of​ money. Opening a​ Roth IRA gives you​ the​ opportunity to​ sit down and teach your child the​ value of​ saving and investing,​ instead of​ yelling at​ them to​ clean their room. While a​ parental lecture on​ the​ need to​ save money would typically meet with glassy eyes and yawns,​ your child’s attitude will undoubtedly change when you​ are talking about their money.
Work and Maturity Issues
Before you​ rush out to​ open a​ Roth IRA for your child,​ you​ must determine if​ your child is​ eligible to​ open an account. to​ open an account,​ your son or​ daughter must be working at​ least part time for an employer that reports their wages to​ the​ IRS. Hiring your child to​ take out the​ trash each week is​ not going to​ cut it,​ nor will this strategy work for your 5 yearold. Many teenagers,​ however,​ have summer jobs that should suffice for IRS consideration. to​ avoid any trouble,​ you​ should consult with your tax advisor.
A more sublime issue concerns the​ maturity level of​ your child. Keep in​ mind that the​ Roth IRA will be opened in​ their name. Your son or​ daughter will have the​ legal right to​ do what they will with the​ account. it​ is​ strongly suggested that you​ clearly explain the​ consequences of​ taking money out of​ the​ account [taxes,​ penalties,​ being cut out of​ the​ will,​ forced to​ eat healthy food,​ grounded for life,​ etc. ] but the​ decision lies with them. as​ difficult as​ it​ is,​ try to​ be objective in​ evaluating how you​ child will react to​ knowing the​ money is​ sitting in​ an account. if​ you​ have doubts,​ you​ should probably investigate other tax saving strategies.
Opening a​ Roth IRA for your child can be a​ very effective means of​ transferring wealth to​ your child and teaching important life lessons. if​ your child exercises restraint,​ your relatively small contribution to​ their Roth IRA can grow into a​ sizeable taxfree nest egg.




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