Lock down Roth IRA [withdrawals by] Young Adult?

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MikeT
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Lock down Roth IRA [withdrawals by] Young Adult?

Post by MikeT »

I want to open up a Roth IRA for my nieces ages 21 & 23.

Any way to prevent them from withdrawing the money?

Thanks,
Mike
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Tamarind
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Re: Lock down Roth IRA [withdrawals by] Young Adult?

Post by Tamarind »

They are adults. Once the money is in an account in their name, it's not your money any more, but theirs.

Do have have specific evidence suggesting they cannot be relied upon to keep the IRS money safe for retirement? If so, consider if you can do something else to help them besides giving money. If not, why treat them like children?
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tyrion
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Re: Lock down Roth IRA [withdrawals by] Young Adult?

Post by tyrion »

There is no way to prevent them from removing the money, but you could certainly offer enticement to keep it in there.

For example, you offer to match their contributions (up to $X) every year if they show you confirmation of the contribution and no withdrawals. That could lead to a bigger conversation, and perhaps a long term relationship built around a common interest. That would be the best outcome. More likely it won't go so well, but at least you will have tried.
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goingup
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Re: Lock down Roth IRA [withdrawals by] Young Adult?

Post by goingup »

No, they can remove it. Also, you are aware each needs to have earned income at least equal to the amount you propose to contribute.
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MikeT
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Re: Lock down Roth IRA [withdrawals by] Young Adult?

Post by MikeT »

Thanks everyone. The family dynamics are complicated.

In a nutshell, I'm concerned their dad who is underwater in house, deep in debt (lots of student debt on behalf of his girls), and on the verge of financial collapse will guilt the girls into giving the money to him to postpone the inevitable bankruptcy.

I'm not dispersing anything until I make sure there are no surprises or land mines with the estate. For a number of reasons, nothing is happening for another 1.5 years so I do have some time to think about it.

The money for them towards a house down payment is already in separate accounts. Maybe I'll just put the eventual Roth IRA money in with that, in a taxable account in my name (not ideal) until I see what happens.

I really was anxious to open the Roths sooner for the obvious tax reasons & compounding tax free, but if the whole thing could be in jeopardy, it's probably best to invest it in separate accounts to keep it safe.

And thanks for the tip about earned income - good point!

-Mike
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celia
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Re: Lock down Roth IRA [withdrawals by] Young Adult?

Post by celia »

Most young adults can't see that far into the future since they are in the stage of just surviving financially on their own. Add the role models your nieces see frequently and there may be no way they will appreciate saving for the future. (The title of your thread implies that.)

Until they realize that there has to be another (better) way to handle finances, this would be a losing battle.

It sounds like you are trying to take the lead in being a positive role model for them. Spend more time with them and get to understand their take on money. When the time is right, you can make short comments, like "you have to spend less than you make". Occasionally challenge them to think of other options than the one they are thinking about, especially in careers.

However, their dad is likely trying to do what is best for them. He has taken out loans for THEIR college, apparently. Maybe the problem is that the loans should have been in the girls' names? If so, they should have some responsibility to pay him back, at least partially.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Lock down Roth IRA [withdrawals by] Young Adult?

Post by livesoft »

I simply never told my kids that one could withdraw from a Roth until they were old. Of course, I realize that doesn't help the OP, but my kids have been kept in the dark about withdrawals because otherwise I might end up not being a happy camper.
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Toons
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Re: Lock down Roth IRA [withdrawals by] Young Adult?

Post by Toons »

It is their money. 8-)
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Sidney
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Re: Lock down Roth IRA [withdrawals by] Young Adult?

Post by Sidney »

MikeT wrote:I really was anxious to open the Roths sooner for the obvious tax reasons & compounding tax free, but if the whole thing could be in jeopardy, it's probably best to invest it in separate accounts to keep it safe.
Would they likely be investing this in equity (presumably for their retirement many years out)? If so and you hold it in equity and bequeath it to them in your will, they get stepped up basis and the gain isn't taxed. Pretty close to your original objective.
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MikeT
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Re: Lock down Roth IRA [withdrawals by] Young Adult?

Post by MikeT »

That's great out-of-the-box thinking Sidney.

The more I think about it, my primary object is to provide the money-owner's-manual their parents never provided or modeled.

I told my niece that she'll have to read a book or two first. Then, we'll make an investment decision together so she understands what she's investing in, and the power of compounding.

Though there is certainly a risk she could cash out the Roth to give to her dad WHEN he falls on hard time (and he will), I think the greater objective of learning could be achieved with getting her on a budget, and me doing matching funds over 12 or 24 months. I envision once/month reviewing how much she saved, and I'd match. That way I'd have continued involvement for a sustained period of time, instead of just once when setting up the account.

Thanks!

Mike
Engineer250
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Re: Lock down Roth IRA [withdrawals by] Young Adult?

Post by Engineer250 »

MikeT wrote: In a nutshell, I'm concerned their dad who is underwater in house, deep in debt (lots of student debt on behalf of his girls), and on the verge of financial collapse will guilt the girls into giving the money to him to postpone the inevitable bankruptcy.
This is why I'm not a fan of parents taking out debt for their kids to go to college. Do the girls still have student loan debt? If they do, could you start a matching program with them wherein if they pay $x towards the loan you will match up to a certain amount? That seems a lot more likely to build strong habits at this age.

You seem quick to blame Dad for financial irresponsibility here (and I'm sure he is responsible for a big part of it) but it sounds like he also took on a lot of debt to pay for their education, and that's no small task. I don't think it's absurd that he might want repayment for that.
Where the tides of fortune take us, no man can know.
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MikeT
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Re: Lock down Roth IRA [withdrawals by] Young Adult?

Post by MikeT »

Their Dad's financial life is an absolute train wreck Engineer250 .

Sure, it's admirable to take on debt for your kid's education.

However, his entire adult life could be characterized by borrowing, defaulting, having my parents bail him out. During this time, he was driving a leased Lincoln Navigator, leased Ford Explorer, leased Acura, and he got two leased Acura's for his two daughters in college. Meanwhile, he can't make ends-meet and was constantly asking my mom for money "for the girls education".

Just so I don't sound too harsh and unsympathetic, he doesn't know any better and has too big of an ego to get any kind of financial counseling. And, people in a desperate financial situation make terrible decision (like rolling negative equity from one leased SUV into the next.

That's why I'm so interested in changing the family tree of debt and teaching his daughters the power of compounding, saving and living within one's means.

My biggest concern is that he'll want the $10k from the two girls and it will only postpone his financial collapse by some# of months.

-MikeT
Engineer250
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Re: Lock down Roth IRA [withdrawals by] Young Adult?

Post by Engineer250 »

MikeT wrote:Their Dad's financial life is an absolute train wreck Engineer250 .

Sure, it's admirable to take on debt for your kid's education.

However, his entire adult life could be characterized by borrowing, defaulting, having my parents bail him out. During this time, he was driving a leased Lincoln Navigator, leased Ford Explorer, leased Acura, and he got two leased Acura's for his two daughters in college. Meanwhile, he can't make ends-meet and was constantly asking my mom for money "for the girls education".

Just so I don't sound too harsh and unsympathetic, he doesn't know any better and has too big of an ego to get any kind of financial counseling. And, people in a desperate financial situation make terrible decision (like rolling negative equity from one leased SUV into the next.

That's why I'm so interested in changing the family tree of debt and teaching his daughters the power of compounding, saving and living within one's means.

My biggest concern is that he'll want the $10k from the two girls and it will only postpone his financial collapse by some# of months.

-MikeT
Sounds like my in-laws (are we related?) I look forward to them asking me and my spouse for money/help when they inevitably haven't saved enough for retirement. Leased vehicles and all, this is all very familiar. And two daughters (spouse's half-siblings) still in college. Unfortunately, if your nieces are anything like my sisters-in-law, they have picked up all their parents' bad habits of expectations for a middle class lifestyle, new cars, and are unprepared for the life ahead of them. Perhaps I am so interested because it's so like my own family. The girls in my case are still in college, I suspect they'll be moving back in with mom & dad once they graduate, and probably get low paying jobs unrelated to their degree. They did see their sibling work hard, save money, wait to buy new, etc. so I hope by being good role models will be half of it. The other half...

Are your nieces working yet? I stand by the conviction the best thing you can do is "match" contributions. Getting a solid paying job and paying off student loan debt should be priority #1. Is Dad still paying for leased vehicles? Are they going to need to save up for a used car? If you match their contributions to a Roth IRA they are much more likely to think of this as "their" money not his. If they want to help him, maybe they can live at home and pay rent. Then they have a cheap place to live and he has a little extra money coming in, win-win. If you agree to match on a used car, don't give them the money, just agree to show up at the buy with a check to the seller, that way you're teaching them to save up, and incentivizing them, without putting money in their hands. Good luck. My in-laws are just slightly younger so I am eager to hear how it goes. I am just now trying to explain the importance of a 529 to my sister for my 6 mo. and 2 y/o nephews. My sister and her spouse joked their plan was to hope the rules would change for tuition, or student loan debt would be forgiven, so I am hoping to get them and their kids on the right track from a much earlier age.
Where the tides of fortune take us, no man can know.
Topic Author
MikeT
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Re: Lock down Roth IRA [withdrawals by] Young Adult?

Post by MikeT »

Engineer250, if my brother's mess wasn't bad enough with the leased cars and living beyond his means, he purchased a $500,000 house with his girlfriend at the time (she put up ALL the down payment - $200,000). The property had an easement for a 6 lane highway in the backyard. He was convinced it would never be built. Guess what: they built it and the property drop to just under $400,000 and has never recovered. He and his girlfriend split up 5 years ago: she's been renting a townhouse for $25,000 / year. He's struggling to pay both halves of the mortgage and operating costs. Neither of them are familiar with the idea of not throwing good money after bad. He's so house-focused that he doesn't realize that after the x gets her downpayment back, and he pays her back other money he owes her, he'll be lucky if his 15 years of payments net him $100k. His ego is so wrapped up in the big house, leased cars he doesn't realize that he won't have income in retirement. It's really depressing to watch (and stressful).

(sorry everyone for getting off financial track in this thread, but it's really weighs heavy on me).

-Mike
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