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Author: borngiantsfan Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75375  
Subject: Starting IRAs for Children Date: 10/19/2011 7:31 PM
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I am thinking of starting my 18 year old children with a small IRA. They both are in college and have part time jobs earning about $3k per year. They also both have small investment accounts that we started with about $3500 each in them.

So I was thinking of starting them off with a small IRA (about $500 per year) to get their retirement planning going early. I am considering going with a Roth IRA mainly because:
- their income level is so low, there is no tax benefit with a Traditional IRA
- The Roth is tax free at withdrawal time, when they will likely have a higher tax liability
- Funds can be withdrawn from a Roth IRA for home purchase if needed
- The ROTH IRA is more flexible than a traditional IRA in many other ways.

Any thoughts or comments on this?

It seems like a way to get them going towards a retirement plan, without easy access to the money (as in the investment account) except for a home purchase. In other words they can't simply pull the money out and buy a something :).


Thanks
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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69694 of 75375
Subject: Re: Starting IRAs for Children Date: 10/19/2011 7:59 PM
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borngiantsfan: "I am thinking of starting my 18 year old children with a small IRA. They both are in college and have part time jobs earning about $3k per year. They also both have small investment accounts that we started with about $3500 each in them.

So I was thinking of starting them off with a small IRA (about $500 per year) to get their retirement planning going early."


They will need to sign the paperwork, probably, unless you have a formal Power of Attorney and can convince some financial institution to honor it.

"I am considering going with a Roth IRA mainly because:
- their income level is so low, there is no tax benefit with a Traditional IRA"
OK

"- The Roth is tax free at withdrawal time, when they will likely have a higher tax liability"

Until 9/9/9 passes or the FairTax or any other consumption based tax.

"- Funds can be withdrawn from a Roth IRA for home purchase if needed"

I believe that up to 10k can be withdrawn from a traditional IRA without penalty for a first-time home purchase. And with respect to the Roth IRA, "funds" is imprecise. IIRC, contributions can be withdrawn without penalty, but if you are withdrawing earnings, then the usual rules apply.

"- The ROTH IRA is more flexible than a traditional IRA in many other ways."

Many? Other than no RMDs, which more of a theoretical issue for mos people, what other way?

"It seems like a way to get them going towards a retirement plan, without easy access to the money (as in the investment account) except for a home purchase. In other words they can't simply pull the money out and buy a something :)."

Well, they can pull it out easily enough if they are willing to live with the tax consequences (and and related family consequences).

Nonetheless, I generally like the idea.

Regards, JAFO

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Author: borngiantsfan Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69695 of 75375
Subject: Re: Starting IRAs for Children Date: 10/19/2011 9:16 PM
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Hi JAFO,

Thanks for your reply. A few thoughts and corrections:

1. "- The Roth is tax free at withdrawal time, when they will likely have a higher tax liability"
To which you responded - "Until 9/9/9 passes or the FairTax or any other consumption based tax."

You are correct, though I have three thoughts in response:
- given the lack of major overhaul of the tax code in the past, I don't see a major overhaul happening in the future
- in most proposed plans over the past 2 year that have an income tax component, there is little talk of eliminating the "tax-exempt" nature of the Roth IRA. And I don't see the US going to a solely consumption based tax system
- so based on the most likely income based tax systems to be in place in the future, it is highly likely that a traditional IRA distribution 50 years from now will be taxable and the Roth IRA distibution now since it was already taxed at their current (and almost 0% tax) rate

2. "- Funds can be withdrawn from a Roth IRA for home purchase if needed"
To which you responded - "I believe that up to 10k can be withdrawn from a traditional IRA without penalty for a first-time home purchase. And with respect to the Roth IRA, "funds" is imprecise. IIRC, contributions can be withdrawn without penalty, but if you are withdrawing earnings, then the usual rules apply."

You are sort of correct:
- Up to $10K can be withdrawn from a Traditional IRA for a 1st time home purchase without the 10% early withdrawal penalty. but you still have to pay the applicable taxes on the withdrawal (state, federal, etc.)
- The Roth IRA allows you to pull out up to $10K of the profits in the IRA (once account has been open for 5 tax-years) both penalty free and tax free
- And, as you pointed out, the initial contribution money can always be pulled out with out tax or penalty. and in fact, it is required that the initial contribution "funds" be withdrawn first, before the "earnings". So with a Roth, and assuming there is over $10K in the account, more than $10K could be available for home purchase.

3. "- The ROTH IRA is more flexible than a traditional IRA in many other ways."
To which you responded - "Many? Other than no RMDs, which more of a theoretical issue for mos people, what other way?"

ok, clearly using the word "many" was a little off. What other ways?
- no RMD - you already mentioned
- ability to pull out initial contributions without tax or penalty for pretty much any reason. Trad IRA has several exceptions where you can pull out without penalty, but you still pay tax.

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Author: hockeypop Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69696 of 75375
Subject: Re: Starting IRAs for Children Date: 10/20/2011 5:04 AM
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FWIW I provided a ROTH to my daughter but matched her contributions on a one-to-one basis. She got into the habit of saving and was immediately rewarded.

She/you can also use that for college. Read the last paragraph about the potential impact on financial aid.
http://moneywatch.bnet.com/retirement-planning/blog/what-wor...

Roth IRA. Another option is to have your student make contributions to a Roth IRA instead of the parent saving in a 529 Plan. In order to be eligible to contribute to a Roth IRA, your student must have earned income equal to or more than the amount of the contribution (Note: dividends and interest income don’t count as earned income). Money in a Roth IRA can be invested in much the same way you can invest in a 529 plan, and the availability of investment options is dictated by the financial company that provides the Roth IRA account.

One good thing about a Roth IRA is that contributions can be taken out before the earnings. In addition, the contributions portion can be used for any purpose, including education, without tax or penalty.

But I’ve always said that a Roth IRA is a much better retirement vehicle than a college-savings vehicle. Earnings on a Roth can be distributed tax-free after the account owner reaches age 59½, as long as the money has been in the Roth IRA for at least five years. But earnings that come out before age 59½ are taxable even when used for college expenses (however, the 10-percent early distribution penalty may be waived under the special exception for higher-education expenses.)

The surprise for many parents is the potential financial-aid penalty of using a Roth IRA: The entire IRA distribution, taxable or not, must be included in base-year income on the student’s federal financial-aid application for the following year. This can reduce the amount of need-based financial aid.


Hockeypop

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69698 of 75375
Subject: Re: Starting IRAs for Children Date: 10/20/2011 11:16 AM
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I offered to match(1-1) for Roths for my kids from the time they started working(varied from 14-16) and continue to do so(24,27,30).

I did it to encourage them to save for retirement and get them started. I do it now because I can and would rather offer this than have them wait for me to die to inherit.

In other words they can't simply pull the money out and buy a something :).

Depending on your state, they have financial majority at 18. They are most likely to follow whatever example you've set concerning finances. If you plan to have some type of control based on the Roth, good luck.

Putting $500 in a Roth isn't much different than having the money in their investment accounts. It's theirs to do with as they please. In both cases, you will be impacting their taxes and choices so it would be good if they fully understand what you've done/are doing.

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Author: OxBeaux Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69700 of 75375
Subject: Re: Starting IRAs for Children Date: 10/20/2011 6:58 PM
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I am thinking of starting my 18 year old children with a small IRA. They both are in college and have part time jobs earning about $3k per year. They also both have small investment accounts that we started with about $3500 each in them.

I have been doing this for my three daughters since they turned 18 and had jobs. I am retired and getting SSI payments that I do not need and I consider this as a way to give back some of the money that the Govt takes from them to give to me. Kinda like a privatized social security account. The money is invested and has grown nicely.

One of the benefits of this is that as they got jobs they already had had the education of watching savings grow and had the incentive to save their own.

Two of my daughters have jobs that have 401k plans and have saved a lot of money on their own along with Roth IRAs for their spouses.

As for how it's done: I just Had them open a Roth (Fidelity was my choice) and then I fund it and manage the funds for them.

I can tell you that if you have raised them right there will probably not be any problem with them raiding the funds to buy toys.

OxBeaux.

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69701 of 75375
Subject: Re: Starting IRAs for Children Date: 10/20/2011 7:37 PM
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OxBeaux, et. al.,

I hope all of you are careful not to contribute to your kid's IRAs in excess of their taxable, earned income...

I'm sure most of the posters here already know not to do this, but some readers might not and might think it's a great idea to just go out and open an IRA for their kids without researching the requirements and consequences.

Just my 2 cents,
- Joel

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69703 of 75375
Subject: Re: Starting IRAs for Children Date: 10/21/2011 1:41 PM
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....Any thoughts or comments on this?...

One possible pitfall is that if they ever get divorced then their "ex" might get half of the retirement accounts.

It is not exactly the same but be sure that you are making the maximum contributions to you own(and any spouses) retirement accounts first. The kids will likely be named beneficiaries so in effect they will become the kids someday so the inherited IRA(or similar) would give them the about the same benefit as having their own accounts.

Another alternative would be to buy investments in your taxable accounts to plan on having them go to your estate at a stepped up cost basis.

I would also consider getting long term care insurance before contributing to a kids retirement account to help avoid the possibility of depleting your savings(and your estate) or becoming a burden on them if you live to be 105.

Greg

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Author: OxBeaux Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69704 of 75375
Subject: Re: Starting IRAs for Children Date: 10/21/2011 1:53 PM
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I hope all of you are careful not to contribute to your kid's IRAs in excess of their taxable, earned income...

Their earned incomes have always exceeded the max contribution amount.

OxBeaux

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Author: OxBeaux Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69705 of 75375
Subject: Re: Starting IRAs for Children Date: 10/21/2011 1:58 PM
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One possible pitfall is that if they ever get divorced then their "ex" might get half of the retirement accounts.

My youngest is divorced and the court gave none of her Roth to the ex because it was all deemed a gift from her parents. Make sure you keep records.

OxBeaux

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Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69706 of 75375
Subject: Re: Starting IRAs for Children Date: 10/22/2011 3:22 PM
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I am retired and getting SSI payments that I do not need

===========================

Are you sure it's SSI? SSI is not Social Security.

http://www.ssa.gov/pgm/ssi.htm

The Supplemental Security Income (SSI) program pays benefits to disabled adults and children who have limited income and resources.

SSI benefits also are payable to people 65 and older without disabilities who meet the financial limits.

--------------

I've never seen anyone getting SSI that didn't need it. I didn't even know it was possible.

Jean

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Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69707 of 75375
Subject: Re: Starting IRAs for Children Date: 10/22/2011 3:26 PM
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My youngest is divorced and the court gave none of her Roth to the ex because it was all deemed a gift from her parents. Make sure you keep records.

OxBeaux
----------------------------

Whoa....

Can it be a gift for the divorce and income to the IRS?

Jean

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69708 of 75375
Subject: Re: Starting IRAs for Children Date: 10/22/2011 4:53 PM
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My youngest is divorced and the court gave none of her Roth to the ex because it was all deemed a gift from her parents. Make sure you keep records.

OxBeaux
----------------------------

Whoa....

Can it be a gift for the divorce and income to the IRS?

Jean


Gifts are never taxable income to the recipient. They can sometimes trigger a gift tax on the giver.

My guess is that because the Roth was funded by gifts from the parents the gifts remained separate property and not community property. Therefore, the ex-spouse was not entitled to any of the Roth in the divorce.

--Peter

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Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69709 of 75375
Subject: Re: Starting IRAs for Children Date: 10/22/2011 5:22 PM
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Gifts are never taxable income to the recipient. They can sometimes trigger a gift tax on the giver.

My guess is that because the Roth was funded by gifts from the parents the gifts remained separate property and not community property. Therefore, the ex-spouse was not entitled to any of the Roth in the divorce.

======================

I understand that. But I thought that the Roth had to be funded by income to qualify.

Nevermind. It doesn't really say that, just that the contribution can not be more than income.

So if it is a gift from someone, should the gift really be made directly to the Roth and not given to the kid and then put in the ira?

Jean

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69710 of 75375
Subject: Re: Starting IRAs for Children Date: 10/22/2011 7:09 PM
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So if it is a gift from someone, should the gift really be made directly to the Roth and not given to the kid and then put in the ira?

Well, I'm just guessing that this was potentially a community property issue. IRA accounts are certainly identified as to the owner - there is no such thing as a joint IRA.

In community property states, the receipt of a gift is generally separate property and not community property, unless the gift is commingled with community funds. So if the gift was given to the individual and then deposited in a community account before being transferred to the IRA, then the gift might become community property. However, if the gift were deposited directly in the IRA, it seem to this lay person that the gift would retain it's character as separate property.

I'm sure there are ways to attack that from a legal standpoint, so you'd need to consult a lawyer to be sure. But my guess is that making the deposit directly to the IRA is a good step toward keeping the money as separate property.

--Peter

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Author: Yumoroz Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69711 of 75375
Subject: Re: Starting IRAs for Children Date: 10/24/2011 1:04 PM
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I've never seen anyone getting SSI that didn't need it. I didn't even know it was possible.

Jean


why not, it is possible, and I am sure is happening somewhere,
but is called a "fraud" :)
(did not mean the original poster of course)

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Author: OxBeaux Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69712 of 75375
Subject: Re: Starting IRAs for Children Date: 10/24/2011 1:40 PM
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"Can it be a gift for the divorce and income to the IRS?"

Not if the gift was under the limit.

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Author: OxBeaux Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69713 of 75375
Subject: Re: Starting IRAs for Children Date: 10/24/2011 1:47 PM
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My guess is that because the Roth was funded by gifts from the parents the gifts remained separate property and not community property. Therefore, the ex-spouse was not entitled to any of the Roth in the divorce.

That is the case.

Also since his 401k and his roth were funded with joint funds during their marriage she got half. Before she married him he had 0 savings and he lived paycheck to paycheck. Since he had no regard for money that he couldn't spend without penality he agreed to give her the entire 401 and roth balances in loo of other assets.

He will most probably end up old and broke.

OxBeaux

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Author: OxBeaux Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69714 of 75375
Subject: Re: Starting IRAs for Children Date: 10/24/2011 1:52 PM
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So if it is a gift from someone, should the gift really be made directly to the Roth and not given to the kid and then put in the ira?

Jean


That sounds like picking nits to me. Once the check is written it doesn't matter where it is deposited.

Also I have two CPAs in the family:DW and DD. Both assure me they can defend it to the IRS.

OxBeaux

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Author: OxBeaux Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69715 of 75375
Subject: Re: Starting IRAs for Children Date: 10/24/2011 1:57 PM
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I'm sure there are ways to attack that from a legal standpoint, so you'd need to consult a lawyer to be sure. But my guess is that making the deposit directly to the IRA is a good step toward keeping the money as separate property.

Right again Peter. The divorce judge wanted evidence that the money had been gifted directly to the ROTH And as you said never commingled with joint funds.

OxBeaux

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Author: OxBeaux Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69716 of 75375
Subject: Re: Starting IRAs for Children Date: 10/24/2011 2:03 PM
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I've never seen anyone getting SSI that didn't need it. I didn't even know it was possible.


That's on me. I used SSI to mean Social Security Income instead of Supplemental Security Income.

I'll try to be more accurate in the future.

OxBeaux

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Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69717 of 75375
Subject: Re: Starting IRAs for Children Date: 10/24/2011 2:18 PM
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That's on me. I used SSI to mean Social Security Income instead of Supplemental Security Income.

I'll try to be more accurate in the future.

OxBeaux
=============================

It's a common mistake. I just wanted to make sure.

Thanks, I learned a lot from this thread.

jean

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