ON THE MONEY: Helping your children become wealthy
In last week’s column, I touched upon a number of steps that we can take to help our children become more financially independent. Once we have achieved that objective, why not go the extra mile and help them to become wealthy?
One way to jump start your children’s retirement savings is to fund a Roth IRA for them when they are still in high school or college.
Suppose that your son works full-time in the summer and part-time during the remainder of the year and will earn $8,000 in 2012.
If you are convinced that your son is saving the bulk of his earnings for college and not frittering it away, you could deposit up to $5,000 into a Roth for him.
Remember that with a Roth, there is no upfront tax deduction, but the beauty is that there are no mandated withdrawals down the road from a Roth.
Moreover, growth in the underlying assets of a Roth is completely tax-free not simply tax-deferred.
There is one caveat with this Roth funding – this strategy should not be employed if your child intends to apply for financial aid. All lending formulae treat assets that are held by your children, even those in an IRA, as available to pay for college costs.
Another approach that I am fond of for grandchildren (I have used this strategy for each of my two granddaughters) is to purchase a limited pay participating whole life policy from a top-rated mutual life insurance company on each of their lives.
Using this company’s current dividend scale, which is at a 25-year low, a premium of $5,000 each year for 10 years, insuring a 5-year old-female could produce staggering results, greater than simply the $500,000 initial death benefit.
Total premiums for 10 years would amount to $50,000 with no more premiums due.
If your granddaughter did not withdraw any funds until the beginning of her age 66, she could withdraw more than $65,000 each year, tax-free, for the remainder of her life!
That growth would represent a 5.73 percent internal rate of return, but remember that insurance dividends are not guaranteed, but since this particular company is AAA rated, the chances are that their dividends could even produce better results in the future.
Another planning step you can take now if one of your parents is alive and will have dollars in an IRA account when he or she passes away is to make certain that your children are named as contingent beneficiaries of the account.
Assuming that you are the primary beneficiary, you are allowed to “disclaim” the money when your parent dies, thereby allowing it to pass to your 12 and 14-year-old children.
By passing the IRA dollars to the next generation, the tax-deferred growth of a regular IRA will compound for many years.
Sure, the children will have to withdraw some dollars each year as required minimum distributions, but those amounts are based on each child’s life expectancy, not on your father’s or your life expectancy.
You can further compound the benefit by establishing a taxable investment account and putting the net withdrawals into that account.
When your children reach majority – 18 in South Carolina – they will gain control of both accounts, but if you have properly educated them on financial matters, they should gladly let those IRA dollars remain and compound for many more years.
Obviously, if your parent’s IRA is a Roth, the benefits are magnified dramatically, since your children would not have to withdraw assets at any specified age in the future.
Talk about a tax shelter – your children could easily become millionaires from this strategy.
Another effective strategy to help your children grow wealthy is to give them appreciated stock.
Assume that you give your married son $15,000 in stock this year that you paid $7,500 for.
If your son and daughter-in-law’s adjusted gross income, including the $7,500 gain on the stock, is less than $70,700 this year, your son would pay no capital gains at all on the subsequent sale of the stock, provided that sale took place this year.
Got a financial planning question for Greg? You may email him at email@example.com.
Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience.