Can't find a reason not to Roth IRA - Do you concur?

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Can't find a reason not to Roth IRA - Do you concur?

Postby Splais » Fri Apr 05, 2013 12:46 pm

70 years old (excellent health) and single. One 23 year old heir. Retired, income fixed at around $84K AGI. Will inherit another $100K + house when mom passes away (94, good health).

I have $6K I am putting aside in an account for above heir starting this year. Plan to add to it regularly, probably never reach Roth limit by age, income, or contribution. Right now I have that $6K split 50-50 between Vanguard Target Retirement Income fund (VTINX) and MM, while I go through my investing learning curve (this is all new to me until about a month ago).

I got looking at this whole thing and I can't find any reason why I shouldn't put this little nest egg into a Roth IRA so that whenever I or hopefully heir draw it out it will be tax free. Heir is only 23 and I have no idea what his income or personal situation may be in 20 or 30 years. Anyway, I can't find any current negative on the front end (except for age limit on heir), and do see the tax advantage on the back end to doing this Roth IRA vice just a straight investment. Comments?
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Re: Can't find a reason not to Roth IRA - Do you concur?

Postby Iorek » Fri Apr 05, 2013 12:55 pm

Do you have any earned income? The limit on a Roth is $5500 or earned income, whichever is lower.
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Re: Can't find a reason not to Roth IRA - Do you concur?

Postby kenyan » Fri Apr 05, 2013 1:02 pm

Iorek wrote:Do you have any earned income? The limit on a Roth is $5500 or earned income, whichever is lower.


OP is over 50, so (s)he can contribute an extra $1000/year.
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Re: Can't find a reason not to Roth IRA - Do you concur?

Postby Watty » Fri Apr 05, 2013 1:16 pm

A few question;

1) I know there is an age limit for traditional IRA's but I'm not familiar with there being an age limit on Roth accounts and a quick search in Google did not find anything. Could you explain what you are referring too?

2) It was not clear if you would be contributing to a Roth in your name or to a Roth in your heirs name.

If it was going to be in your name, then let it be inherited someday, then you would still need to have $6,000 in earned income from working to make the contribution into your Roth. Income from pensions or investments don't qualify so unless you are still working then you will not be able to make the Roth contribution into your account. If you don't have any earned income then you may still be able to convert money from an IRA or 401K into a Roth account by paying the taxes to do that.

If you were going to put money into a Roth account for your heir, in their name, then what you have to do is give the money to the heir then have the deposit the money into the Roth. (There may be some exceptions for a disabled kid or a minor where you could act on their behalf).



Assuming that you are eligible and putting the money into a Roth in your name then I don't see any reason not to put the money into a Roth.
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Re: Can't find a reason not to Roth IRA - Do you concur?

Postby Splais » Fri Apr 05, 2013 1:22 pm

you have to be 59.5 years old to not have a withdrawal penalty on earnings. but Watty may have ruined my "grand plan". All my income is from SS and CSRS federal retirement program, so I guess that means no earned income and no Roth IRA; unless I want to gift him the money and set it up in his name.
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Re: Can't find a reason not to Roth IRA - Do you concur?

Postby pingo » Fri Apr 05, 2013 1:25 pm

...in which case he must have enough earned income to qualify for the (donated) contribution. :wink:
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Re: Can't find a reason not to Roth IRA - Do you concur?

Postby Splais » Fri Apr 05, 2013 1:30 pm

he does. But it looks like the best thing, at this low levels of money, is to let the thing ride for a few years and see how things go. Question if i let this MF just go and add to it; if after say ten years I want to gift it to him into some type of IRA, would the money be taxable moving from a taxable account to an IRA, Roth or otherwise?
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Re: Can't find a reason not to Roth IRA - Do you concur?

Postby Iorek » Fri Apr 05, 2013 1:38 pm

Splais wrote:he does. But it looks like the best thing, at this low levels of money, is to let the thing ride for a few years and see how things go. Question if i let this MF just go and add to it; if after say ten years I want to gift it to him into some type of IRA, would the money be taxable moving from a taxable account to an IRA, Roth or otherwise?


Money isn't taxed when moved from a taxable account into a retirement account but there are limits on how much can be put in a retirement account each year. If you end up with a taxable account with $30k of mutual funds in it, in all likelihood he would need to spread that amount over a period of years to get the money into a retirement account.

There also in theory can be estate/gift tax issues if you give someone over $13k a year. In practice if your estate is well under $5 million those may not matter, but again it would be an argument for giving the heir smaller amounts of money each year, rather than a large lump sum in a few years.
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Re: Can't find a reason not to Roth IRA - Do you concur?

Postby pingo » Fri Apr 05, 2013 2:44 pm

I don't recall if the another aspect of this has been mentioned: I think if he inherits the taxable assets, he benefits from a stepped up basis, so he would not be taxed on all the growth you'd have experienced while owning the funds.

However, my understanding in this area is very limited and I may be mistaken.
Last edited by pingo on Fri Apr 05, 2013 6:42 pm, edited 1 time in total.
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Re: Can't find a reason not to Roth IRA - Do you concur?

Postby DiscoBunny1979 » Fri Apr 05, 2013 3:24 pm

Splais wrote:you have to be 59.5 years old to not have a withdrawal penalty on earnings. but Watty may have ruined my "grand plan". All my income is from SS and CSRS federal retirement program, so I guess that means no earned income and no Roth IRA; unless I want to gift him the money and set it up in his name.


It's my understanding that if someone starts contributing after 59.5 they still have to meet the 5 year requirement of the ROTH being 5 years old to avoid early withrdawl penalties.
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Gifting to heir.

Postby Taylor Larimore » Fri Apr 05, 2013 3:44 pm

Splais:

If you won't need the money and you intend to give it to your heir, why not give the money now when he probably needs it most?

Pingo's post may have a bearing, in which case, waiting until you receive an inheritance from your mother (to share with your heir) may be a better plan.

Best wishes.
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Re: Can't find a reason not to Roth IRA - Do you concur?

Postby Watty » Fri Apr 05, 2013 5:18 pm

Splais wrote:you have to be 59.5 years old to not have a withdrawal penalty on earnings. but Watty may have ruined my "grand plan". All my income is from SS and CSRS federal retirement program, so I guess that means no earned income and no Roth IRA; unless I want to gift him the money and set it up in his name.


One alternative would be to figure out some way to have a "fun" job that would bring in some income each year so that you would qualify for the Roth.
I've known people who have been movie extras, taught bridge on a cruise ship, paid dog walker, paid church office help, high school umpire, theater or sports event usher, etc. It might not pay a lot but there are lots of niches where you can find a little income and be doing something that you enjoy.
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Re: Can't find a reason not to Roth IRA - Do you concur?

Postby Default User BR » Fri Apr 05, 2013 7:49 pm

DiscoBunny1979 wrote:It's my understanding that if someone starts contributing after 59.5 they still have to meet the 5 year requirement of the ROTH being 5 years old to avoid early withrdawl penalties.

I don't believe that to be correct. See Pub 590:

http://www.irs.gov/publications/p590/ch02.html#en_US_2012_publink1000231064


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Re: Can't find a reason not to Roth IRA - Do you concur?

Postby DiscoBunny1979 » Fri Apr 05, 2013 8:02 pm

Default User BR wrote:
DiscoBunny1979 wrote:It's my understanding that if someone starts contributing after 59.5 they still have to meet the 5 year requirement of the ROTH being 5 years old to avoid early withrdawl penalties.

I don't believe that to be correct. See Pub 590:

http://www.irs.gov/publications/p590/ch02.html#en_US_2012_publink1000231064


Brian


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Yes, at first glance I always thought that to be the case, but if you look at the diagram offered by that publication in Figure 2-1, the first question asks whether the ROTH IRA has been opened more than 5 years. If you answer no, you proceed to the box that states it's not a qualified distribution. So it's my interpretation that the ROTH has to be opened for 5 years AND one has to be over the age of 59.5.
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Re: Can't find a reason not to Roth IRA - Do you concur?

Postby Epsilon Delta » Fri Apr 05, 2013 9:51 pm

DiscoBunny1979 wrote:Yes, at first glance I always thought that to be the case, but if you look at the diagram offered by that publication in Figure 2-1, the first question asks whether the ROTH IRA has been opened more than 5 years. If you answer no, you proceed to the box that states it's not a qualified distribution. So it's my interpretation that the ROTH has to be opened for 5 years AND one has to be over the age of 59.5.

You have wait 5 years and be over 59.5 to get a qualified distribution. But contributions can come out tax and penalty free at any age, and once your over 59.5 there is no 10% penalty so you can withdraw any conversions tax and penalty free at any time. So the only thing you can't withdraw tax free are earnings; in practice this is often not a problem because 5 years of earnings is small enough to manage.
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Re: Can't find a reason not to Roth IRA - Do you concur?

Postby DiscoBunny1979 » Fri Apr 05, 2013 10:21 pm

Epsilon Delta wrote:
DiscoBunny1979 wrote:Yes, at first glance I always thought that to be the case, but if you look at the diagram offered by that publication in Figure 2-1, the first question asks whether the ROTH IRA has been opened more than 5 years. If you answer no, you proceed to the box that states it's not a qualified distribution. So it's my interpretation that the ROTH has to be opened for 5 years AND one has to be over the age of 59.5.

You have wait 5 years and be over 59.5 to get a qualified distribution. But contributions can come out tax and penalty free at any age, and once your over 59.5 there is no 10% penalty so you can withdraw any conversions tax and penalty free at any time. So the only thing you can't withdraw tax free are earnings; in practice this is often not a problem because 5 years of earnings is small enough to manage.


------------

Fair enough, But in my opinion, an IRA is a "retirement account" not a savings for a year account. Just because some folks here believe one can use it for an "emergency" fund does not negate the fact that the purpose of a ROTH IRA is for retirement savings/investing. The OP is asking whether a ROTH can be used not only to save during his retirement, but leave such for his heirs. That can serve the purpose providing rules are maintained and he has earnings to contribute. But I would not open a ROTH with the "intention" of taking out all contributions after a year or two and just leave "interest" "gains" or earnings. Since one can not put back money after it is taken out, one should look good and hard about the purpose of the account.
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Re: Can't find a reason not to Roth IRA - Do you concur?

Postby Splais » Fri Apr 05, 2013 10:42 pm

I agree. I can see no reason to put money in a "retirement" account you plan to take out shortly; I.e.less than retirement age. My reason for my original post was concerning a "starter" retirement account for my son that I would still have access too in some sort of really serious financial problem. But sense I don't have the required earned income, the question is moot.
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Re: Can't find a reason not to Roth IRA - Do you concur?

Postby Default User BR » Sat Apr 06, 2013 2:35 am

DiscoBunny1979 wrote:Yes, at first glance I always thought that to be the case, but if you look at the diagram offered by that publication in Figure 2-1, the first question asks whether the ROTH IRA has been opened more than 5 years. If you answer no, you proceed to the box that states it's not a qualified distribution. So it's my interpretation that the ROTH has to be opened for 5 years AND one has to be over the age of 59.5.

I think you realize now that this refers to taxability. Penalty is also due unless an exception applies, one of which is age 59.5.


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Roth for a house down-payment?

Postby Taylor Larimore » Sat Apr 06, 2013 8:00 am

I can see no reason to put money in a "retirement" account you plan to take out shortly; I.e.less than retirement age.


The reason is this: Money in a Roth IRA compounds tax-free. Let's take an example:

A young couple are saving to buy a house sometime within the next 5 years. They must make a choice with their savings. 1) Save exclusively for their down payment. 2) Save part for the down payment and part for retirement. They decide that all their savings are needed for the down payment (a reasonable choice).

The couple can invest in a taxable account where earnings are taxed, or a Roth where earnings are not taxed (an easy choice). If for some reason they don't buy the house, their Roth account is a great start for retirement.

Another reason for starting a Roth early: Certain benefits require a 5-year waiting period from January of the first year a Roth is first opened.

Best wishes.
Taylor
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Re: Can't find a reason not to Roth IRA - Do you concur?

Postby Splais » Sat Apr 06, 2013 8:14 am

Yes, I see your point. Under the right conditions it could add up to a hefty tax free profit
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