IRA Roth Account: Creative Planning

Creative IRA Roth planning can leave a significant tax free legacy for a young child

A little creative IRA Roth planning can leave a significant tax-free legacy for a young child.

IRA Roth Accounts are amazing tools for accomplishing wealth creation and transfer.
One creative use of a Roth account is naming a young child as the beneficiary.
At your death, the tax law allows the child to take minimum required distributions for his/her own life expectancy.
The potential is pretty incredible, as illustrated by the following hypothetical example:

Suppose John is 60 and has a 10-year-old granddaughter, Julie.
John has a modest IRA Roth account with $5,000 in it and knows he will probably never need the money during his or his wife’s lifetime.
He decides to name Julie as the beneficiary.
He sets up a restricted beneficiary form that only allows Julie to withdraw the actual required distribution amount after his death, for the rest of her life.

Suppose John dies ten years later at age 70 and the Roth account has grown to about $14,000.
Julie is now 20 years old with a remaining life expectancy of 62 years.
The tax law requires her to withdraw some of the money each year, but each withdrawal is tax-free.

How much money would she potentially receive in cumulative distributions over 62 years if the account stays invested and averages 10% over that time?
Her total distributions over 62 years would be an estimated $1,068,778!

All of the distributions are income tax free.
Under current law, the account is also protected against divorce or legal judgments in most situations.

Imagine your own child or grandchild receiving a tax-free check every year for the rest of his/her life from the account you left.
Inflation will do a number on the real value of $1,000,000 over 60 years, but still, that’s not chump change.
Not bad for a seemingly insignificant $5,000 account!

The idea works for parents or grandparents; the key is naming a young beneficiary and investing the money for potential growth.
It isn’t necessary to use the restricted beneficiary form, but that does guarantee the money isn’t withdrawn early, and the years of tax-free compounding are thus not wasted.

If you’re interested in this concept but don’t have an IRA or an IRA Roth, you can contribute $4,000 ($5,000 if you are over age 50) annually if you have that much earned income and are under the overall income limits for funding a Roth account.
If you’re already retired and don’t have earned income, you might be eligible to convert portions of your regular IRAs if your modified adjusted annual income is under $100,000.
Each situation has to be looked at closely, but in the right circumstances, this can work really well.

The concept works best with Roth accounts, since the distributions to your beneficiary are tax-free.
However, the concept is identical for regular IRAs or non-qualified annuities, except the distributions are either totally or partially taxable as received.

A little creativity with Roth accounts and beneficiary planning can go a long way.
Please call Atlantic Financial with any financial questions on the IRA Roth and how it might apply to your family situation.

Atlantic Financial is happy to answer questions about mutual funds, stocks, IRA's, municipal bonds, 401k's, money management, general investing and any of our programs.