MDNews - Long Island

BY DAVE RAO SOME PARENTS AND GR ANDPARENTS HAVE THAT POSSIBILIT Y IN MIND. I N D I V I D U A L R E T I R E M E N T A R R A NG E M E N T S (IR As) are for retirement saving, right? Absolutely. Is that their only purpose? Not necessarily. Imagine using an IR A not only to save, but to facilitate a home pur- chase. This would obviously be a ta ll order for an adult, given current home values, yearly IR A contribution limits, and the priority of amassing retirement savings. How about for a child, though? Could an IR A help them out? This thought has led some families to open custodial Roth IR As. You can start a Roth IR A on beha lf of a child, as long as that child has "earned income" (that is, income from either a W-2 job or some kind of self-employment). The IR A belongs to the child, but until the child becomes a n adult, you (or some other adult) act as the IR A's custodian. 1,2 T he a n nua l cont r ibution l i m it on that Roth IR A is $6,000 (this limit may be adjusted up in future yea rs due to inflation). Say your kid has made $4,000 from freela nce web design or ser ving up lattes at the loca l coffeehouse … or working at your business. A ll $4,000 could go into that IR A . W hatever the a mount you choose, it should benefit from compounding over the next several years. 3 You might want to consider this pos- sible use for a Roth IR A . What about taxes that come with t a k i n g t he money out ? A f t er-t a x dolla rs go into Roth IR A s, a nd if the account is at least five years old, up to $10,000 of the account ba lance (includ- ing earnings) may be withdrawn without being ta xed, as long as the withdrawn amount is used for a home purchase and the IR A owner has not bought a home in the past two years. In doing this, you can even avoid the 10% ta x pena lty that normally comes when you take assets out of a Roth IR A before age 59½. 1,4 Plans may change, though. When a child turns 18 (or 21, in some states), a custodia l IR A sta r ted on his or her beha lf is no longer custodia l. He or she is now the lega l owner of that IR A . At that time, will the idea of using those IR A funds to buy real estate in the future seem worthwhile? Maybe, maybe not. 5 That young adult may just elect to keep contributing to the Roth IR A and use it as a retirement savings account. Or maybe the IR A is suddenly drained to enable the purchase of a new truck, or to fund a yea r abroad, or to pay for college. Choices will emerge, and parents a nd gra ndpa rents must be mindful of them. There is also the fact that when you withdraw assets from a ta x-advantaged account, you are reducing not only the account ba lance, but a lso the account's potential degree of compounding for the future. These factors must be considered if you embrace this idea. Remember that if traditional IR A dis- tributions are taken before age 59½, they could be subject to a 10% federal income ta x pena lty. Ta x rules a re consta ntly changing, and there is no guarantee that the tax treatment of Roth (or traditional) IR As will remain the same. n Dave B. Rao is the founder of R AO Wealth Partners. He focuses his practice on helping to advise physicians, corporate executives and business owners on their unique financial situations. For more info, visit raowp.com. Citations 1. NerdWallet, June 11, 2021 2. Forbes, July 25, 2021 3. Internal Revenue Service, August 20, 2021 4. U.S. News & World Report, June 16, 2021 5. Business Insider, December 21, 2020 O u r f i r m d o e s n o t r e n d e r l e g a l o r ta x a dv ice . T hi s ar ticl e wa s w r it te n fo r o u r f ir m a n d p ro v i d ed co u r te s y o f M a r k e t i n g P r o . I n v e s t m e n t s i n securities and insurance products are NOT F DIC -I NSU R ED/ NOT B A N K- GUA R A NTEED/M AY LOSE VA LU E . Rao Wealth Partners is an independent firm . Securities and advisory services of fe re d th ro u gh Na t i o n s F i n a n c i a l G roup, Inc.(N FGI), 4000 River Ridge D rive N E , Cedar Rapids, I A , member FINR A /SIPC, a Registered Investment Adviser. Client assets are held at First C learing, LLC (a wholly owned Wells Fargo subsidiary). Help Young Adults Buy Homes? Custodial IRAs Could 1 4❱❱❱❱❱ F I N A N C I A L C H E C K- U P

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