After funding their retirement needs, many wish to pass on any remaining to their heirs. But for some, we wish that we could have some control when they could get the money. One such reader, wanted to know how he could benefit his grandson with the tax free benefit of the Roth IRA.
Grandfather With a Good Heart
The reader was roughly 60 years of age and wanted to open a Roth IRA for his grandson. He wanted to make a $1,000 contribution in the Roth IRA thinking that the grandson would not be able to touch the money until he was age 60, and then could benefit from the tax-free growth that the Roth IRA provides. Just to give you an idea, if $1000 were to earn on average 8% in an stock investment inside the Roth, it would grow to be around $101,000. So the grandson would then have roughly $100,000 of tax-free money waiting for him at retirement. At least that’s what the grandfather was hoping. While I do appreciate the tactic that the grandfather was trying to implement, we do occur a bit of a problem. Since the grandson is a minor and; more importantly, does not have any earned income (I believe the grandson was around 5 years of age) he would not be able to take out the Roth.
Different Strategy
Well, after the initial attempt to pass on to grandson didn’t work out, he inquired about a different approach. Could we then open a Roth IRA for the grandfather and then make the grandson the sole beneficiary? Thinking again that the grandson could not, touch the money until age 60. But unfortunately, in that case, when the grandfather passes away, and if the grandson is the beneficiary, the grandson would inherit the account and then would have access to the money immediately and would not have to wait until age 60. Unfortunately, that idea did not work either.
One Solution
So, based on that situation, the only really possible way for the grandfather to achive his goal would be to set up a trust that would prohibit the grandson from having access to the money to a certain age. In my opinion, waiting till age 60 is probably a bit to the extreme. Having set it up in the trust account, it would not be in a Roth IRA, so therefore there would be no tax-free benefit, which I believe what the grandfather was trying to accomplish
Another possibility
If the grandfather would wait until the grandson was 18, or any age, for that matter, that he actually had the earned income, he could then open up a Roth IRA in the child’s name (a minor can have an IRA as long as they have earned income and there is a custodian on the account). The only downside is that the child would have access to the funds and could withdraw them at any time possibly subject to tax and penalty. But if the child was educated on the tax free benefit waiting for him at retirement, then the grandfather’s wishes may be achieved.
Securities offered through LPL Financial, Member FINRA/SIPC
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