The Roth IRA: Creative Planning

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

A Roth IRA can serve many investment purposes. In fact, a little creative Roth IRA planning could leave a significant tax-free legacy for a young child.

Roth IRA Accounts are truly amazing tools for accomplishing not only wealth creation, but transfer.
One very creative use of a Roth IRA account is naming a young child as the account beneficiary.
At the investor's death, the tax law allows the child to take minimum required distributions throughout his or her own life expectancy.

Suppose John is 60 years old, and has a 10-year-old granddaughter, Julie.
John has a modest Roth IRA account with $5,000 invested in it. John knows he will probably never need the money during either his or his wife’s lifetime.
Therefore, he decides to name his granddaughter Julie as the beneficiary.
John 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 IRA account has grown to $14,000.
Julie is now 20 years old, and she has a remaining life expectancy of an additional 62 years.
The tax law requires her to withdraw some of the money in the account each year, however, 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 or her life from the account you left.

The idea works for parents or grandparents; the key in this example is naming a young beneficiary and investing the money for potential growth.
It isn’t necessary to use the restricted beneficiary form, however, that does guarantee that the money isn’t withdrawn early, and the years of tax-free compounding are thus not wasted.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 a Roth IRA, 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 IRA account.
If you’re already retired and don’t have earned income, you still might be eligible to convert portions of your regular IRAs, provided that 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.

This concept works best with Roth IRA accounts, since the distributions to the account's beneficiary are tax-free.
However, the concept is the same for regular IRAs or non-qualified annuities, except that the distributions are either totally or partially taxable as received.

A little creativity with Roth IRA accounts and beneficiary planning can go a long way.
Contact Atlantic Financial today at: 1-800-559-2900 with any questions on the Roth IRA and how it might apply to your financial situation.

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

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