[quote=AN]I haven’t thought about it. Why would one do roth ira over 529? Unless they already max out 529, coverdell esa, and some custodial account.[/quote]
Can’t speak about coverdell esa, but I can think of many reasons why one would prefer this over a 529 (or only educational fund for that matter)…
529 contributions are only to cover educational expenses. There’s only so much that one should contribute toward it, because if one goes over, it’s not something that can be used for other things without stiff penalties. It’s not as big a problem if you have more than 1 kid or if someone in your household is going to go back to school, because it’s more or less easy to transfer the beneficiary of a 529 to someone else, in case the remaining amount in the account is not used up.
I was thinking of a Roth IRA for a kid as an alternative to a straight out gift or inheritance. For instance, if you gift the IRS limit of $14,000 per year to your kid, chances are you’re going to put it into post tax account, which if it earns decent returns, is going to be taxed… The tax rate will be your tax rate more or less, even if you file your kid separately. Rather than gifting all of it to a post-tax account, if you gift the $5000 max contribution to to a Roth account (assuming fed’s don’t change Roth rules, which is a possibility also)…, theoretically any gains from that Roth will be tax free…If you’re doing this starting as say age 8, and you have a tax free return of 5+% each year (that’s a big if)…That’s a non trivial amount of money that doesn’t need to be taxed as it compounds..And furthermore, no estate taxes since that contribution each year was a gift amount that’s under the IRS gift limit per year…And most likely the allowed Roth contribution for your kid will be near maximum because he/she won’t have anywhere near income that would subject him/her to Roth IRA contribution phase out when he/she is a kid…(I don’t think your income would be used to consider the phase out of your kid’s Roth IRA)…
Also, added bonus… I believe Roth fall under retirement accounts…Hence not generally able to be tapped if kid shall be sued/files bankruptcy/etc I believe. (again, need to do some figuring out on that)….
And since it’s not part of your estate, it’s probably not fair game if you get sued…
The caveat is that the money is earmarked very early on for use 55+ years later and a lot can happen during that time.
1) Roth rules can change
2) Something horrible happens to the USD
3) Your kid dies
4) Your kid ends up being completely irresponsible and cashes out with penalty and buys a Porsche for his/her dad.
5) and probably many others…
Well, #1 and #2 you can’t really do anything about
#3.. I think you can cover for if your have a living trust or will with the kid, and that spells out what happens to the funds (it goes back to you or your other kid or someone else…need to look at that)…
#4…I think you probably can setup a custodial arrangement to ensure the purpose of how and when the funds are used. .(need to look into that too)…
Need to do more research on this… Thankfully, I have time….I think the only really issue is the kid having real income as a kid to be able to have a Roth account…And that’s where I can see the small business legitimately hiring your kid being useful…
