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Supercharged Gifts For Children And Grandchildren: Roth IRAs

Supercharged Gifts for Children and Grandchildren: Roth IRAs

You’ve probably heard that for 2013, the amount of money you can give another person without incurring a gift tax is $14,000. Money gifts that may slide under the gift-tax limit are often an ideal tool for parents and grandparents who want to transfer wealth to younger generations of their family as tax efficiently as possible. Plus, these gifts can be very powerful if given over the course of several years.

Many folks simply transfer gift money to their donee’s taxable accounts. However, there may be an even better way to help a portion of this gift continue to grow tax-free: Roth IRA contributions.

Here’s how it works: If your child or grandchild has a job and earned income, but perhaps due to cash-flow reasons isn’t able to make a Roth IRA contribution on his/her own, you can make the Roth IRA contribution on the child’s behalf. In 2013, the annual Roth IRA contribution limit is the lesser of either 1) the account-holder’s (the child or grandchild’s) taxable compensation for the year or 2) $5,500 for kids/grandkids under age 50 and $6,500 for those over age 50.

The beauty of Roth IRAs is that while there is no upfront income tax deduction for contributions, any growth in the Roth IRA is  sheltered from income tax—even on withdrawals if certain requirements are met. For younger beneficiaries like teenagers, this can be a very efficient way to start saving for retirement, since they have so many years ahead of them for their money to grow.

There are no age restrictions to this strategy. The only limitations are that the child or grandchild owning the Roth IRA must have some earned income (W-2, Schedule C, etc.). This money does not include investment income (dividends, capital gains, etc.). The Roth owner must also have total income under certain thresholds in order for a contribution to be made directly to a Roth IRA account. In 2013, the limitations are as follows:

If the donee’s filing status is…And your modified AGI is…Then donee can contribute…
Married Filing Jointly or Qualifying Widow(er)< $178,000Up to the contribution limit
> $178,000 but < $188,000A reduced amount
> $188,000Zero
Married Filing Separately and donee lived with his/her spouse at any time during the year< $10,000A reduced amount
> $10,000Zero
SingleHead of Household, or Married Filing Separately and donee did not live with his/her spouse at any time during the year< $112,000Up to the contribution limit
> $112,000 but < $127,000A reduced amount
> $127,000Zero

Chart Source: www.irs.gov

A few additional points to consider:

  • Will your child or grandchild need the gift money for current living needs or an expense in the near future (wedding, home purchase, or college)? If so, it may be better to simply gift the amount to a regular, taxable account or a 529 College Savings Plan account, depending on the circumstances.
  • If your child or grandchild is married but doesn’t have any earned income, the earned income of his/her spouse can be used to determine if you can make a Roth contribution as a gift.
  • If your family member is making Roth 401(k) contributions at his/her employer, these don’t affect his/her ability to make or accept Roth IRA contributions, if the other requirements are met.
  • Whenever you make annual-exclusion cash gifts or consider other gifting activities, it’s important to consult your accountant and attorney to coordinate the process appropriately.
  • Roth IRA contributions for the previous tax year can be made until April 15th of the following year. For example, a 2012 Roth contribution can be made until April 15, 2013.

Please contact your Wealth Advisor to see if Roth IRA gift contributions might work for you.

 

 

Important Disclosure Information

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This article is not a substitute for personalized advice from RegentAtlantic.  This information is current only as of the date on which it was sent.  The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic.  Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

Please remember that RegentAtlantic does not provide tax or legal advice.  Please consult with a tax advisor and a legal advisor of your choosing prior to implementing any of the strategies discussed in the article.

 

This article is based on RegentAtlantic’s current understanding of tax legislation.  Congress may change this legislation at any time.

 

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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