August 2018

A Summer Treat for your Children or Grandchildren

 

Now that summer is winding down, and kids are going back to school, it’s a great time to consider a wonderful savings idea for your children or grandchildren: Contribute up to $5500 to their <a href=”https://www.investopedia.com/terms/r/rothira.asp” target=”_blank”>Roth IRA</a>.

If your children had a summer job, perhaps as a camp counselor, bank intern or lifeguard, you can contribute up to $5500 to their Roth IRA, but not more than their earnings. There’s a good chance that they didn’t save any of their earnings (think beer, clothes, concerts) or it’s all going to pay for college expenses and other things. However, you have the money! The gift counts toward your annual $15,000 gift tax exclusion ($30,000 if married).

Roth IRAs are excellent savings vehicles offering numerous benefits:

• Money goes in post-tax and goes out tax-free after age 59 ½. You can diversify your retirement funds by tax: some pre-tax and some post-tax.
• A Roth IRA can serve as your <a ref=”https://www.investopedia.com/terms/e/emergency_fund.asp” target=”_blank”>emergency fund</a>. After 5 years, you can withdraw the original contributions (not the earnings). In a pinch, it can be a source of cash.
• Before age 59 ½ your children can withdraw tax-free up to $10,000 in earnings for a first-time home purchase or postsecondary education expenses.
• Other exceptions include permanent disability, unreimbursed medical expenses above 10% of AGI, back taxes and health insurance premiums while unemployed.
• Unlike <a href=”https://www.investopedia.com/terms/t/traditionalira.asp” target=”_blank”>Traditional IRAs</a>, you can continue to contribute to your Roth IRA after age 70 ½, and you are never forced to take a distribution. There are no required minimum distributions.

Contributing up to $5500 for your children and grandchildren is a gift that will keep on giving. Also, consider doing so year after year until you think they are financially stable.

As always, please let me know if you have any questions or comments.

Sincerely,

Henry Gorecki, CFP®