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Funding my Kids' Roth IRAs

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  • #16
    Originally posted by billy View Post
    Just a reminder contributions can be withdrawn penalty free from a Roth IRA before 59.5 years old. Its the earnings that trigger the penalties, and even those can be avoided in many situations (see POF blog for some of them)
    You're absolutely right, thanks for the reminder! I was thinking Roth TSP when I typed that.

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    • #17
      OP, feel free to do what you wish.
      "Roth IRAs in lieu of leaving any significant inheritance, and was wondering if others had considered, or if it was not a great idea."
      Roth contributions are a great idea. If you have funds you wish to give to your kids early, that can be very beneficial.
      Personal opinion is a 529 is better simply to take some of the burden off for developing their personal capital.
      Your responses indicate that you actually are looking for ways to tax efficiently provide contributions earlier. No problem with 529's for grand children either.
      I would not rule out inheritance or cut them off when they were adults. That was implied. Maybe not.


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      • #18
        Originally posted by Tim View Post
        OP, feel free to do what you wish.
        "Roth IRAs in lieu of leaving any significant inheritance, and was wondering if others had considered, or if it was not a great idea."
        Roth contributions are a great idea. If you have funds you wish to give to your kids early, that can be very beneficial.
        Personal opinion is a 529 is better simply to take some of the burden off for developing their personal capital.
        Your responses indicate that you actually are looking for ways to tax efficiently provide contributions earlier. No problem with 529's for grand children either.
        I would not rule out inheritance or cut them off when they were adults. That was implied. Maybe not.
        "in lieu of any significant inheritance". I never said that there would not be anything else. But we would stop funding Roth IRA if it was drawn before 60... that wasn't implied, just stated. And whatever of the estate remained at the time of our deaths that we wanted to leave the children would be divided equally, whether $1 or $1m. They should not expect an inheritance at that point. You already said it wasn't an obligation. I just wouldn't be concerned if there was nothing left to divide at that point.

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        • #19
          Interesting discussion.
          Early life decisions and 'tests' to see if the kids are fiscally responsible and optimal ways of wealth distribution to next generation and beyond.

          UTMA - watch for kiddie tax implications.
          529 plan for college
          Roth IRA (with earned income)

          We're just entering the 529 utilization portion of our life cycle and same for Roth IRA - did matching plan. Earn $, we put in same to Roth IRA; bonus: 1:1 match if they save earned money into taxable investment (index).

          So, for those that FAIL the tests of above -- dip into UTMA for Ferrari, blows 529 on underwater basket weaving or accesses Roth IRA for Sky diving in the the Polynesians. --- some will adjust the downstream inheritance -- ie cut off completely -- while others will NOT alter one bit between the siblings on what they get or how much is prescribed in the Trust fund?

          Makes for some interesting scenarios that we fortunately haven't had to think too hard as so far, the now adult children have been responsible people.


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          • #20
            Originally posted by Special Delivery View Post

            "in lieu of any significant inheritance". I never said that there would not be anything else. But we would stop funding Roth IRA if it was drawn before 60... that wasn't implied, just stated. And whatever of the estate remained at the time of our deaths that we wanted to leave the children would be divided equally, whether $1 or $1m. They should not expect an inheritance at that point. You already said it wasn't an obligation. I just wouldn't be concerned if there was nothing left to divide at that point.
            "whether $1 or $1m" Cutting it pretty tight with a surviving spouse. Think I would stop the roth contribution at some point.
            That is a tough target to hit over 40 years. Do the Roth and good luck. Many kids would love to split $1m.Pocket change.

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            • #21
              Originally posted by Tim View Post
              "whether $1 or $1m" Cutting it pretty tight with a surviving spouse.
              ... You realize those are arbitrary numbers? I'm not cutting anything tight.

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              • #22
                Do it. I think some of the arguments brought up are missing the larger point: a two-physician household with a federal pension plus two social security income streams should easily be able to afford to give away 1MM while they are still living. The surviving spouse should still have millions and the kids will still inherit a nice sum at the end. We plan on continuing Roth match.

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                • #23
                  Yes do it! We've been doing this for our kids since they have had reportable earned income (think lifeguarding over the summer or dishwasher at the pizza place) Couple thousand bucks a piece over a couple years so far. I let them know I'm matching their income in a retirement account as an incentive to work. A little more vague regarding its accessibility, saying you have to pay heavy taxes and penalties if you withdrawal before you retire.....Not an outright falsehood/lie just a nudge-
                  They'll thank you down the road.

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                  • #24
                    Originally posted by Special Delivery View Post

                    For some reason I thought the gift limit was lower. I see now it's $15k per donor, per recipient... thanks!

                    Any particular reason we would fund a taxable account ahead of a Roth IRA? The only thing I can think of is accessibility... and we wouldn't really want them accessing these funds before 60 anyhow. As far as college, we're late to the game. Our kids are 15-19 (oldest is already a senior in college) and we're just cash flowing it.

                    Great idea for the 529s for the grandkids when they come along. Honestly have never looked closely at these due to where we were in life, but just read up on it based on your suggestion!
                    Gifting prior to your death(s) is absolutely a good way to decrease your estate (especially if subject to estate taxes) and very generous. In the end it doesn't matter if you give your child $6000 cash and they find their own Roths, or you fund the Roth for them. Or you fund 529s for the kids, or pay down their student loans, or their mortgages. You can signal your values in whichever way you want but financially all are the same.

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                    • #25
                      Originally posted by FIREshrink View Post

                      Gifting prior to your death(s) is absolutely a good way to decrease your estate (especially if subject to estate taxes) and very generous. In the end it doesn't matter if you give your child $6000 cash and they find their own Roths, or you fund the Roth for them. Or you fund 529s for the kids, or pay down their student loans, or their mortgages. You can signal your values in whichever way you want but financially all are the same.
                      One would hope. However, the Roths I built for my children with a do-not-touch or thou-shalt-get-no-more policy have been a great investment and are still growing. I can’t guarantee 100%, but pretty close to it, that if I had substituted the equivalent in mortgage payments, the financial result would fall far short. Of course, maybe they should be the same, but I don’t think they would,

                      Estate planning for the minority who will owe estate tax at 2nd death is not so much about moving assets in the early years as it is about moving lifetime growth (and continuing that growth in the hands of the recipient). My very rough trust substitute is the result, even though the kids now have full control over it, there is no ttee, and it’s unlikely my estate will have a tax liability. I just thought Roth IRAs were neat when they first came out and it worked for us.

                      Multiply this by the amount parents can remove from their estate annually by taking advantage of the max on the gift tax limit annually ($30k/child for 2 parents) and putting it into an irrevocable trust. Very expensive, but for the couples who will owe estate taxes starting at 40% of the amount over the exemption, very worthwhile (usually). And you get the benefit of asset protection with the trust.
                      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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