A Roth IRA may be an option for grandparents to consider when saving for retirement and while also saving for their grandchildren’s education. The Roth IRA allows account owners to save with tax-free growth* and with the added flexibility to allocate and use the funds when they choose and for any purpose.
What is a Roth IRA:
A Roth IRA is a retirement account funded with after-tax dollars. The contributions generally are not tax deductible but when you start withdrawing funds, qualified distributions are tax-free.
Defining characteristics of a Roth IRA:
* Withdrawals from the account may be tax-free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax.
John and Alice (fictional names) are grandparents of 2 grandchildren, one of whom has special needs. John and Alice have $10, 000/year to contribute toward their retirement savings should an emergency or unforeseen need arise. They also want the opportunity to put these funds toward the goal of funding their grandchildren’s educational expenses and don’t want to miss this opportunity to save for them should the unforeseen or emergency never happen.
Their first thought was to establish a 529 plan & ABLE account for each of their grandchildren. However, while John and Alice feel saving for college is an important goal toward which they want to contribute, they need and want flexibility and control over these funds. Their grandchildren may opt not go to college or John and Alice may have an unforeseen need come along for which they would use this savings.
In meeting with John and Alice and discussing this goal, we suggested another alternative: establishing and funding a Roth IRA. This alternative is open to John and Alice as they both have earned income, file taxes jointly and do not exceed the $189,000 combined household maximum income threshold for Roth IRA contributions. There is no age limitation on opening or contributing to a Roth IRA.
The benefits of saving the $10,000/year in a Roth IRA are tax-free growth, with no limitations on use of funds or withdrawal rules( with exceptions noted above- see *). John and Alice may each contribute up to $5500/ year to a Roth IRA. Today they feel as though they can afford to give their grandchildren money for their futures, but ideally John and Alice would like the option to have the money available to them if there was an unforeseen need. Should they have additional grandchildren, having the money in the Roth IRA can make it easier to distribute the money amongst all grandchildren.
Potential drawbacks to using this approach might occur if the funds were left in the account and John and Alice required nursing care. This savings would be considered in their assets and also, should they pass away, this account would be included as a part of their estate assets. To control disposition of the assets upon their death, they may designate their children or grandchildren as beneficiaries of the account.
When making the decision of how best to save for your grandchild’s future, recognize that every family’s situation is different and that will have an impact on the final decision regarding the best savings option to consider.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for individualized tax advice. There is no assurance that the techniques and strategies discussed are suitable for all individuals or will yield positive outcomes. Please consult tax advisor regarding your specific situation.The Roth IRA offers tax deferral on any earnings in the account. Future tax law can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change. The experiences described here may not be representative of any future experience of our clients, nor considered a recommendation of the advisor’s services or abilities or indicate a favorable client experience. Individual results will vary.
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As we wrap up 2017, we send WARM wishes for the new year and a recap of our top blogs from this year:
1.-5. ABLE Account - Patterned after the 529 Savings Plans, the ABLE account was launched in Massachusetts in 2017. For families, it is important to plan and save for the future of your child with a disability, just as you would for the future of your typical child. Demographics point to a growing population of individuals with disabilities while the ability of the government to provide supports meeting the needs of all is limited. The ABLE Account is one savings option for families and individuals with disabilities to consider in their planning. Read ABLE Accounts: Ten Things You Need to Know . Also, our ABLE Case studies:
7. Managing Trust Assets- how to balance your fiduciary repsonsibility with the needs of beneficiaries. Read more.
9. Planning for College for People with Disabilities - We presented a webinar for Think College, Let's Talk About the Money: Planning for College . On the webinar is discussion of:
10. And last but not least, in 2017 special needs financial planning was recognized by the financial services industry by being featured in Investment News. We are proud to have been the cover story and featured story in their video on the topic. If you haven't seen it yet, take a look; you'll learn a lot about who we are and what we do. Click here to see the video.
Happy Holidays and a best wishes for a peaceful and prosperous 2018.
Our Next Workshop: Wednesday, October 25- Having the Talk- click here for the flyer.
Investment News, a widely read and long-standing premiere publication of the financial advisory profession, devoted their September 18, 2017 issue to planning for people with disabilities.
While doing their research, the editors of Investment News found us, chose to feature us on the cover of their publication and made a video of our personal and professional stories for their website.
We are proud to share the video with you today. The 6-minute video may show you a side of us you do not know!
Click here or on the photo above to view our video and please share it with others!