Create Tax Savings and Transfer Wealth to Your Child with a Roth IRA

Parents must give serious thought to protecting their family through estate tax planning. While life insurance and trust must be part of every plan, Roth IRAs can be a simple tool for passing money to your child on a tax-free basis.
Roth IRA
First, we need a quick overview of the Roth IRA. A Roth IRA is after-tax retirement vehicle that produces huge tax savings because all tax distributions tax-free. The statement can be a bit confusing, so let’s break it down. The downside of a Roth IRA is the fact that donations are not tax deductible like a traditional IRA or 401 (k) s. The upside of a Roth IRA, however, is that all distributions are tax free once people reach age 59. So how you can use a Roth IRA to pass money to your child?
Opening a Roth IRA for Your Child
One of the biggest keys to retirement planning is “time”. The more years you spend saving money for retirement, the more you have to have a blessed day when he arrived. Imagine if

you had started saving for retirement when you were 16. How much greater will be your retirement nest egg? What if you bought Microsoft stock in 1990 and watched it split eight times? Okay, it was painful example if you miss that opportunity. Even so, why not do for your child what you do not do for yourself?
Estate planning basic goal is to pass your estate as possible for your family on a tax-free basis. You can transfer relatively small amounts of money to your child now. If you have a 16-year-old child with a Roth IRA, you can donate $ 4000 in 2005. That is $ 4000 will grow tax-free for 43 years and worth quite a bit. A ten percent return would result in the account to grow about $ 200,000 and the full amount will be distributed free of tax. There are other practical advantages to open Roth IRA for your child.
As a parent, is very important that you teach your children the value of money. Opening Roth IRA gives you a chance to sit down and teach your children the value of savings and investment, instead of yelling at them to clean their rooms. While parents lecture on the need to save money usually will meet with glassy eyes and yawns, your child’s attitude will undoubtedly change when you are talking about their money.
Work and Maturity Issues
Before you rush out to open a Roth IRA for your child, you should determine whether your child is eligible to open an account. To open an account, your son or daughter should at least work part time for an employer that reports their wages to the IRS. Employing your child to take the garbage every week will not cut it; this strategy will not work for your 5-year-old. Many teens, however, has a summer job that should be enough for consideration of the IRS. To avoid problems, you should consult your tax advisor.
Please note that Roth IRA will be opened in their names. Your son or daughter will have the legal right to do what they will with the account. It is strongly recommend that you clearly explain the consequences of taking money from the account [taxes, penalties, are cut from the will, forced to eat healthy foods, sentenced for life, etc.] but the decision is on them. Difficult, try to be objective in evaluating how your child will react to knowing the money was sitting in an account. If you are unsure, you may need to investigate other tax saving strategies.
Opening Roth IRA for your child can be very effective for transferring wealth to your children and teach important life lessons. If your child exercises restraint, your relatively small contribution to their Roth IRA can grow into a big enough nest eggs tax-free.