Iras For Adult Children
Terry, can a parent put away money for an adult child via an ira or Roth ira directly or do the parents have to give them the money to invest? We are interested in helping our kids but are unsure of what options are open to us legally. What about for a grandchild?
SAVAGE SAYS: Im going to give you two different answers. First, regarding the IRA, the basic issue is whether they are eligible for a deductible IRA, or a non-deductible IRA or a ROTH IRA (which depends on their income level. Heres a link to those determinants:
If your adult child is eligible, but not contributing because of lack of funds or just not concerned about saving for retirement, you can give him or her the money each year. But since an IRA is an INDIVIDUAL retirement account, he or she would have to open his own account perhaps at Fidelity or Vanguard and make the investment. Then it will be reported on his/her tax return, especially if taking a deduction for the contribution.
Your Parents Will Retire Broke
Dont take this personally. But, theres a very good probability that your parents will retire broke.
According to a GOBankingRates survey, a whopping 64% of Americans are expected to retire with less than $10,000 in their retirement savings accounts. More troubling is that 45% admitted that they had no money saved for retirement.
As if that werent concerning enough, data from Northwestern Mutuals 2019 Planning & Progress Study shows that 56% of American adults arent aware of how much money theyll need to retire. Without determining this, that makes it almost impossible to effectively save in order to create and meet retirement goals.
And, even if your parents have been saving, they probably arent setting aside enough. Experts recommend that when it comes to retirement savings, you should earmark 10 to 20 percent of your salary 15% is often the magic number though. Unfortunately, Bankrate found that only 16% of Americans are setting aside 15% or more of their salary towards retirement. For a majority of people, theyre saving less than 10% of their income.
The short of this? Youre probably going to have to assist your parents by helping them develop a retirement plan or financially after they retire.
Is My Father Right Should I Not Open An Roth Ira
Hi all, just looking for a bit of advice.
My Uncle is a Licensed Stock Broker, albeit in another state, and has approached me about setting up a Roth IRA. I’ve always been, well bad with my money and kind have squandered a good thing in the past few years, although I’m now trying to turn it around. I’m 27, live with my parents and make roughly 30k a year. I have no significant bills other than my phone bill and the car I drive is completely paid off. So the idea of starting an IRA for a nice payout right around the time I’ll want to settle down sounds amazing. I told my father and he’s like, “What the hell is wrong with you, are you stupid? What money do you have to be putting in an IRA?” He pointed out that I’m trying to get into medical school soon, and technically couldn’t buy a car now if I wanted to.
I can’t tell if I still haven’t fully developed into my own individual adult and am still so easily swayed by my father, or if he’s right. Any and all advice appreciated.
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About The Site Author And Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey and connect with and help others who share the same goal.
Tax Treatment Of An Inherited Retirement Account
Most retirement accounts are funded with pre-tax dollars so distributions are fully taxable to you, the beneficiary, as regular income. Accordingly, if youve inherited a large 401 or IRA, consider working with your financial and tax advisor to develop a strategy to minimize taxes on distributions and ensure the approach aligns with the rest of your financial situation.
The rules for inherited Roth IRAs are a bit different. If its been at least five years since the original account owner first funded the Roth IRA, distributions will be tax-free. The funds are still subject to the 10-year rule.
If the decedent made after-tax non-Roth contributions to an IRA, youll need to find the records to prove it to exclude the appropriate amounts from your taxable income.
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Joint Account With Your Siblings
You have heard of parents keeping a separate bank account for their childrens education. Same logic, but this time for our parents future expenses ranging from medical bills to
It is up to you and your siblings if you would like to invest that savings to earn a better return than keeping it in an ordinary savings account. However, I would not recommend investing in high-risk investments as we would not know when we would need the money.
Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our investing reporters and editors focus on the points consumers care about most how to get started, the best brokers, types of investment accounts, how to choose investments and more so you can feel confident when investing your money.
Investing disclosure:
The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. Investing involves risk including the potential loss of principal.
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Who Doesnt Have To Take Their Inherited Retirement Account In 10 Years
There are three exceptions to the 10-year rule. Minor beneficiaries have until the age of majority before the clock starts on the 10-year period. The 10-year rule doesnt apply to disabled beneficiaries or those less than 10 years younger than the decedent. These beneficiaries could withdraw the funds over their lifetime using the pre-2020 required minimum distribution rules for inherited retirement accounts.
Three Strategies To Mitigate The Impact Of The 10
Footnotes
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Legal Consequences Of A Joint Bank Account
A joint bank account carries some legal risks for parents and children, Colorado attorney Catherine Seal says. These legal consequences vary by state and can cause financial hardships.
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Siblings could be disinherited. Depending on the terms of the account, the money could go to the co-owner when a parent dies. The rights of survivorship on the account could bypass a will or other estate planning provisions.
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The money could be involved in a divorce. The bank account may be listed as an asset in the adult childs divorce. An attorney would have to build a record to prove that the money belongs to the parent.
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Either owner could forfeit eligibility for financial assistance. Whether the adult child wants financial aid for his college-bound kid or the elderly parent needs Medicaid, the money in the account is factored into eligibility.
Preparing For The Conversation
Its important to set the right tone for the initial conversation. Youll want to make your intentions clear, say why youre starting this conversation and show how each of you stands to benefit.
Daughters and daughters-in-law are usually the prime movers in starting these conversations, says Carolyn Rosenblatt, an elder care attorney in San Rafael, California.
Because women are the caregivers and nurturers, they almost always initiate talks about financial matters, says Rosenblatt, who wrote The Family Guide to Aging Parents: Answers to Your Legal, Financial, and Healthcare Questions.
And setting the right tone is not only a question of what you say but also where you say it.
The conversation should occur in a place where parents feel comfortable, Rosenblatt says. Find a location that signifies comfort and peace and will put them in the right mood their home, a park, a special restaurant.
Other experts recommend using a location that can create trust and that suggests not only the gravity of the situation but also that its all aboveboard.
Find someone the elder trusts and respects to witness the conversation, says Leonard Raskin, a certified financial planner and founder of consulting firm Raskin Global in Hunt Valley, Maryland. He suggests holding the dialogue at the senior parents attorneys office, a doctors office or with a senior ombudsman present.
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Can I Set Up A Retirement Account For My Parents
Underage drinkers are not allowed to participate. Whether the child is in the financial service industry or not depends on their earning ability. If your child is 18 years old or older, you will need to open a custodial Roth IRA. There are still some firms and banks that do not offer custodial IRAs, but Fidelity and Charles Schwab both do.
Advantages Of Gifting An Hsa
An HSA has some important advantages over other ways of saving for healthcare costs:
- Contributions are pre-tax: Contributions to an HSA are made pre-tax like a traditional IRA or a 401-retirement plan.
- Deposits can carry from year-to-year: HSA contributions roll over from one year to the next if they arent withdrawn for healthcare expenses.
- Investment choices: Balances in an HSA can be invested in mutual funds and other financial instruments much like a 401. Investment options can help the account grow more quickly than a traditional savings account.
- Tax-free withdrawals:Funds withdrawn from an HSA for approved medical expenses are not taxable. The pre-tax contributions and any earnings while the money was inside the account are tax-free when the funds are used for appropriate medical expenses. This makes an HSA an extremely efficient way to save money for health expenses when you have a HDHP.
A good way to help a child or grandchild who is working for an employer that offers an HSA plan is to fully fund it each year for them. The contribution will help them save taxes each year on the amount invested. More importantly the growth in the account can be used to cover future medical expenses tax-free.
For more ways to help your children or grandchildren reach financial independence, here are some other gifting strategies to consider.
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How To Help Your Parents Financially And Still Save For Retirement
12 Min Read | Sep 27, 2021
Theres nothing quite like the sense of security and accomplishment when you know youre on the path to a comfortable retirement. But that feeling can quickly dissolve into stresseven guiltwhen you discover your parents are lagging dangerously behind on their own retirement journey.
“My husband and I are in a good place for retirement,” Cerissa H. told us. “Our parents, however, are notand for different reasons.” Cerissas parents had careers in full-time ministry and never had a large income. On the other hand, her in-laws are drowning in debt thanks to several rental properties.
“We are concerned about their quality of life, the lack of long-term care insurance, and the debt,” she said. “How do we prepare for a life where we will probably inherit adult dependents and debt? How do we encourage my parents to maintain hope for their financial future? And how do we respectfully talk to my in-laws about their debt?”
Why A Roth Ira Can Be Right For Kids
Now that you know whether your kids can have a Roth IRA, you might be wondering if they should. Aside from the momentum of investing early, there are several reasons why a Roth IRA in particular can be a good choice for children:
1. Contributions can be withdrawn at any time
Retirement accounts are known sticklers about distributions many charge a 10% penalty on money taken out before age 59½. Thats tough on kids, who arent exactly known for their ability to delay gratification.
But a Roth IRA is different. The money contributed to the account can be withdrawn at any time and used for anything from a Matchbox car to a first real car.
That flexibility is balanced by stricter rules for the Roth IRA accounts earnings, or the return on contributions that are invested. Distributions of investment earnings may be taxed as income, penalized with a 10% early distribution tax or both.
Those two rules make the Roth IRA a nice middle ground between kids who want easy access to their cash and parents who want to make sure some of that cash is saved for the future.
» Get the full details on Roth IRA early withdrawals
2. More time means more growth
Is waiting that long a hard sell? Maybe mention that a one-time contribution of $6,000 in a Roth IRA — with no additional contributions at all — would grow to about $200,000 in 60 years .
3. Investing trumps saving
4. The tax advantages are prime for kids
5. The money can be used for more than retirement
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Open A Custodial Roth Ira
There are several ways that you can gift a Roth IRA. One is opening a custodial account for a minor. Lets say youre a parent or grandparent who wants to help kids secure their financial futures. Instead of just telling them about Roth IRAs , you could start one for them in their name.
Since theyre minors, it has to be a custodial account. An increasing number of brokerages offer these Roth IRAs for kids. Some firms even waive or reduce their usual account minimums to set one up.
A Roth IRA can help a child save not only for retirement but also for college or a first home. Opening a Roth may even encourage the child to get a job or start a little side business so they can add money to the account.
Once the child is no longer a minor, you can still give them money each year to help fund their Roth accounts, as long as they meet the earned income and other requirements.
How Do I Prove My Childs Income For A Roth Ira
Roth IRAs are fantastic tax-saving vehicles. Investing in a Roth IRA allows you to grow your money tax-free. A Roth IRA provides the combined benefits of tax-free accumulation and tax-free disbursements at age 59 1/2, notwithstanding the fact that contributions are not tax deductible. Long-term advantages can be substantial. We recommend that you contribute to your Roth IRA even if you cant afford it, and that you start with taxable savings.
I recently received the following reader query about Roth accounts:
Reading your site entries is a genuine pleasure for me. Thank you for all of your advice on investment and retirement planning. Id like to get your thoughts on investing for children. I just cashed some savings bonds that had been issued in my two childrens names . Im considering putting the proceeds from the sale into a Roth IRA for each of my children. Do you see any drawbacks to this decision? Of course, this year Ill be filing taxes for each of my children.
Funding your Roth IRA is usually one of the best financial decisions you can make, and the earlier you start contributing, the more time your money has to compound and grow. This makes a Roth IRA a fantastic gift for your minor children. Unfortunately, there are a few drawbacks.
Only the IRS maximum or the individuals earned income, whichever is smaller, can be put into a Roth IRA.
More information is available in my post How to Open a Roth for Your Child.
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