Roth IRA to pass along to child

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Samm Bucus
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Joined: Wed Feb 28, 2018 8:09 pm

Roth IRA to pass along to child

Post by Samm Bucus » Tue Mar 13, 2018 3:38 pm

Hello!

I have two questions. Both about how to proceed with my Roth IRA. Thank you all much for your advice!

I currently have about $58k in a Vanguard Roth IRA. It is all Target 2045 funds. When I started investing that seemed like a great option as it was my only investment. I still think it was, however as life has changed some I now also have a 401k. As I learn more about investing I realize if I want to pass along something to my son, a Roth IRA would probably be the best way to do that because of RMDs. Keep in mind this scenario assumes my 401k will cover myself and my wife in retirement. We are trying to plan ahead to leave something for our son. He is currently the primary beneficiary and my wife my 401k beneficiary.

My understanding is I can let a Roth IRA grow my entire lifetime, it will pass on to my son upon my death, and he will have to take RMDs at that time. My 401k is split 50/50 Roth/Trad but even the Roth 401k will have RMDs for myself.

Unfortunately my Target 2045 is set to re-allocate the closer I get to retirement! I tend to be conservative and thought the Target Retirement account was a safe bet. But also a limiting one...If my intention is to pass the Roth IRA along, I should have it in another fund type.

-When I leave my current job, I can roll over my Roth 401k to a Roth IRA directly and Trad 401k to Trad IRA, pay taxes and then a Roth. Is that correct? If so, I can not worry about the Target 2045 funds because it would be a wash in the end.

-Would anyone advise selling my Target 2045 funds to basically by them back as Total Stock Market and Total International Stock Market- the stock funds the Target 2045 is made up of? I was also considering this a little because if I consolidated all my accounts at Merrill Lynch, who administers my 401k (with Bank of America) I would have enough assets to qualify for the Preferred Rewards Platinum level. But the perks are not enough- rewards benefits on credit cards, discounts on fees, etc- to make selling my Target 2045 funds a good choice. The biggest benefit would be a slight expense ration reduction. It seems the best would be to leave my Roth IRA alone, any future contributions not be Target Retirement just regular funds/ETFs, then roll my 401k to Vanguard later in life and my Roth 401k can be earmarked for my boy.

Does that make sense? Or am I missing big pieces?

Thanks all!

-Emergency Funds - 3-6 mos
-Debt - $63k HELOC at 4.25% V
-Tax Filing - Married filing jointly
-Tax Rate - 12%
-State - Maine
-Age - 38
-Desired Asst Allctn - 80-95% stocks
-Desired Intrntl - 15-30%

401k administered by Merrill Lynch, roughly $42k:
-Vanguard Index 500 (VGINT) 37%, er 0.01%
- Vanguard Ttl Intl (VGIST) 31%, er 0.06%
- Vanguard Extd Mkt (VGIET) 28%, er 0.02%
- Vanguard Ttl Bond (VGITT) 4%, er 0.03%

Roth IRA- at Vanguard, all Target Retirement 2045, roughly $58k

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Kevin M
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Re: Roth IRA to pass along to child

Post by Kevin M » Tue Mar 13, 2018 4:03 pm

Samm Bucus wrote:
Tue Mar 13, 2018 3:38 pm
My understanding is I can let a Roth IRA grow my entire lifetime, it will pass on to my son upon my death, and he will have to take RMDs at that time. My 401k is split 50/50 Roth/Trad but even the Roth 401k will have RMDs for myself.
Under current law, I believe you can roll the Roth 401k into a Roth IRA, without paying any taxes, and then no RMDs will be required by you from the Roth IRA.
Unfortunately my Target 2045 is set to re-allocate the closer I get to retirement! I tend to be conservative and thought the Target Retirement account was a safe bet. But also a limiting one...If my intention is to pass the Roth IRA along, I should have it in another fund type.
This is easy enough to do. First, at 90% stocks, TR 2045 definitely is not conservative, nor a safe bet unless you're in the camp that stocks are not risky in the long run.

At any rate, if, for example, you don't want the fund to drop below 90% stocks, first exchange it to the longest-dated TR fund available, currently TR 2065, as that will remain at 90% for longer. Then in many years, when the fund starts to reduce its stock allocation, exchange it into the longest-dated TR fund at the time (assuming the Vanguard TR funds are structured roughly the same by then).

Or, if you want 100% stocks, just exchange it now into one or two stock funds.

There is no cost at Vanguard to do exchanges, so there is no impediment here.
I was also considering this a little because if I consolidated all my accounts at Merrill Lynch, who administers my 401k (with Bank of America) I would have enough assets to qualify for the Preferred Rewards Platinum level. But the perks are not enough- rewards benefits on credit cards, discounts on fees, etc- to make selling my Target 2045 funds a good choice.
Totally confused by this. Don't get how consolidating at ML in the future relates to selling the TR fund now.
The biggest benefit would be a slight expense ration reduction. It seems the best would be to leave my Roth IRA alone, any future contributions not be Target Retirement just regular funds/ETFs, then roll my 401k to Vanguard later in life and my Roth 401k can be earmarked for my boy.
You would want to roll the 401k's to IRAs at Vanguard. Then you'll have the Roth IRA that was there all along, and the rollover Roth IRA, and you can plan on leaving all or part of these to your son, as you won't have to take RMDs from them during your lifetime.

Kevin
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Earl Lemongrab
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Re: Roth IRA to pass along to child

Post by Earl Lemongrab » Thu Mar 15, 2018 2:03 pm

You can hold Vanguard funds at Merrill Edge. I think with Target funds you can probably buy them.
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oldcomputerguy
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Re: Roth IRA to pass along to child

Post by oldcomputerguy » Thu Mar 15, 2018 2:10 pm

Samm Bucus wrote:
Tue Mar 13, 2018 3:38 pm
-When I leave my current job, I can roll over my Roth 401k to a Roth IRA directly and Trad 401k to Trad IRA, pay taxes and then a Roth. Is that correct?
Minor nitpick: rolling a traditional 401k into a traditional IRA does not generate a taxable event. Converting that traditional IRA to a Roth IRA does.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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