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 tax-free basis. Roth IRA First, we need a quick summary of the Roth IRA. A Roth IRA is an after-tax retirement vehicle that produces huge tax savings because all tax distributions are tax-free. 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 401(k)s. The upside of a Roth IRA, however, is that all distributions are tax-free once the person reaches the age of 59?. 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 tax-free basis. You can transfer relatively small amounts of money to your child now. If you have a 16 year-old child with a Roth IRA, you can contribute $4,000 in 2005. That $4,000 is going to grow tax-free 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 tax-free. 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 year-old. 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 tax-free nest egg..
Richard Chapo is CEO of http://www.businesstaxrecovery.com - Obtaining tax refunds for small businesses by finding overlooked tax deductions and credits through a free tax return review. He can be reached at richard@businesstaxrecovery.com.Early Distributions From Retirement Plans
An early distribution from an Individual Retirement Arrangement (IRA) or a qualified retirement plan need not be a "taxing" experience. Fortunately, there are exceptions to early distributions. Any payment that you receive from your IRA or qualified retirement plan before you reach age 59? is normally called an "early" or "premature" distribution. As such, these funds are subject to an additional 10 percent tax. But there are a number of exceptions to the age 59? rule that you should investigate if you make such a withdrawal.
Some of these exceptions apply only to IRAs, some only to qualified retirement plans, and some to both. IRS Publications 575, Pensions and Annuities, and 590, Individual Retirement Arrangements (IRAs), have details.In addition to the 10 percent tax on early distributions, you will add to your regular taxable income any distributions attributable to "elective deferrals" that you contributed from your pay, your employer's contribution and any income earned...
Early Distributions From Retirement Plans
Ira > Early Distributions From Retirement Plans
For Entrepreneurs A Simple IRA May Be Best
Q: I own a small decorating business and I'll be the first to admit that I don't know anything about taxes or retirement plans. I'd like to set up a 401(k) or an IRA or some other kind of retirement plan for me and my three employees. What are the various retirement plan options available for a small business owner and in your opinion, which would work best for me?-- Wanda S.A: Wanda, I appreciate your confidence in my humble opinion, but asking me for financial advice is like asking Donald Trump for a recommendation on hair care products. I can tell you what works best for me and my business, but you'll need to do your homework and seek professional advice to figure out what would work best for you. As a side note, I hear that Donald Trump is coming out with his own line of hair care product soon to be called "Big Head." The formula is 1% mousse, 1% liquid nails, and 98% hot air.
It should be a big seller among the high brow, comb-over crowd.Here's my best advice on retirement...
For Entrepreneurs A Simple IRA May Be Best
Ira > For Entrepreneurs A Simple IRA May Be Best
Early Distributions From Retirement Plans
An early distribution from an Individual Retirement Arrangement (IRA) or a qualified retirement plan need not be a "taxing" experience. Fortunately, there are exceptions to early distributions. Any payment that you receive from your IRA or qualified retirement plan before you reach age 59? is normally called an "early" or "premature" distribution. As such, these funds are subject to an additional 10 percent tax. But there are a number of exceptions to the age 59? rule that you should investigate if you make such a withdrawal.
Some of these exceptions apply only to IRAs, some only to qualified retirement plans, and some to both. IRS Publications 575, Pensions and Annuities, and 590, Individual Retirement Arrangements (IRAs), have details.In addition to the 10 percent tax on early distributions, you will add to your regular taxable income any distributions attributable to "elective deferrals" that you contributed from your pay, your employer's contribution and any income earned...
Early Distributions From Retirement Plans
Ira > Early Distributions From Retirement Plans