Why Cash Isn’t Always The Best Donation

Why Cash Isn’t Always The Best Donation

 

Whether it’s your time, money or a box of things from your garage – giving feels good. Donating cash or writing a check to your favorite charity is an amazing way to give back. It’s also fairly easy and the most obvious method for charitable donations, but it may not be the best strategy.  So, before you reach for your check book, make sure you understand your options.

One of the problems with donating cash at the bank is that for many people, there’s no Federal tax advantage.  That’s because the IRS doubled the standard tax deduction in 2018 and limited certain deductions we used to be able to itemize.  Depending on how you file and how old you are, the 2021 deduction is now between $12,550 for a single filer under age 65 and $27,800 for joint filers over the age of 65.  Therefore, if all your allowable deductions (including your charitable contribution) are less than this amount in a given tax year, you will not save any money in federal taxes by giving cash. In 2021, there is one exception to this that allows single filers to deduct up to $300 in charitable donations and joint filers to deduct up to $600, while taking the standard deduction.

The good news is, there are some options that can save you on taxes and allow you to direct more dollars to the non-profit close to your heart.

 

Qualified Charitable Distribution (QCD)

Once you reach age 72, you will be required to start distributing a certain percentage from your pre-tax retirement accounts, such as IRAs and 401(k) plans. These required distributions are taxable as ordinary income, unless they are given directly to a charity as a Qualified Charitable Distribution (QCD).  This is an excellent strategy for many people, even when giving smaller amounts.  By giving directly from your IRA, you eliminate taxes on the amount given (up to $100,000 annually) regardless of whether you itemize or take the standard deduction.  Unlike other charitable deductions, QCDs also reduce your Adjusted Gross Income (AGI).  This is important because your AGI is a factor in many other tax calculations, so reducing it can also reduce your Social Security taxes and Medicare premiums, increase your medical expense deductions, and help you qualify for certain tax credits.

To highlight the effectiveness of this strategy, here is an example of a couple who wants to donate $10,000

 

Clustering Contributions

If you tend to give every year and your itemized deductions are close to the standard deduction amount, clustering your contributions can be very beneficial.  For example, if you give $20,000 every year you might instead give $40,000 this year and nothing the following year.  This would allow you to itemize in the year you donated $40,000 and take the standard deduction the following year.  Even if you itemize, if your itemizations don’t exceed the standard deduction by the amount of your charitable contributions, clustering your contributions can increase your total deductions over a multiple year period.  This strategy is particularly useful if you have unusually high income one year from the sale property, a business sale, a large bonus or vesting employee stock. If you are able to cluster your contributions using a cash donation, this year may be particularly beneficial for some people since the IRS has waived the usual 50% of income deduction limitation for 2021.

 

Donor Advised Fund

Many people want to take advantage of the clustering strategy, but feel an obligation to give to a certain organization every year, don’t want to give it all away at one time, or are not ready to decide which charities to donate to. In this case, using a Donor Advised Fund may be appropriate.  These funds allow you to cluster several years of contributions for an immediate tax deduction and then to donate them over time. Until the funds are donated, they can be invested and grown tax deferred.

 

IRA Designated Funds

While the IRS does not allow QCDs from IRA accounts to Donor Advised Funds, you are permitted to make a QCD to a Designated Funds. Unlike Donor Advised Funds, Designated Funds have predetermined charitable beneficiaries, so they do not give you the flexibility to determine the organizations at a later date.  They do offer an immediate tax deduction and allow for flexibility on the timing the organization receives the funds.

 

Donating Appreciated Assets

For anyone who owns appreciated assets outside of qualified retirement accounts, donating these assets without selling them first can be a great strategy.  It’s particularly useful for people that have a highly concentrated stock positions and want to reduce their risk by selling some of the stock.  I think seeing a simple example highlights the tax benefits best.

  • An Oregon couple purchases stock for $10,000. Years later the stock is worth $50,000.
  • If sold, they would have a $40,000 taxable gain. The couple has $200,000 of other taxable income, so they would owe 15% in Federal long-term capital gains taxes, 3.8% in Net Investment Income tax and 9.9% state income tax – totaling $11,480 in taxes. This reduces their donation and possible deduction to $38,520.
  • If they instead donate the stock directly, they avoid the federal and state taxes on the sale, the charity receives a larger donation, and they receive a larger deduction.

 

Estate Planning

You can also incorporate charitable giving into your estate plan by naming a charity as a beneficiary on an investment account or in your trust or will.  This is often utilized by people who want to leave a legacy behind.  Since you receive a tax deduction on your estate taxes, this is a particularly good strategy for people who have a taxable estate and want to have access to funds during their lifetime.

When incorporating charitable giving into your estate plan, it’s important to consider how assets are taxed depending on who they are left to.  For example: an IRA that is left to individuals will be taxable as ordinary income to your heirs, non-retirement accounts may receive a step-up in cost basis (basically forgiving the tax on investment gains) and Roth IRAs are passed tax-free.  It’s therefore advisable to leave IRAs to charity and leave your non-retirement accounts and Roths to your friends and family.

 

State Programs

For my fellow Oregonians, The Oregon Cultural Trust is an underutilized resource that can allow you to double your impact when donating to one of 1,400 different Oregon non-profits. You can see which organizations qualify on their website: www.culturaltrust.org. By making a matching donation of up to $500 per person you will effectively have your match refunded to you in the form of a tax credit, which reduces your tax due dollar for dollar. The matched amount is then granted to cultural nonprofits across Oregon. Residents of other states may have access to similar programs.

 

Charitable Gift Annuity

For people who need additional income a charitable gift annuity can be a good option to consider. In exchange for the donation, the charity provides an income stream for your life, or some other set period of time, and you receive an immediate partial tax deduction.

 

Charitable Trusts

If you have significant assets that you would like to donate during your lifetime, you might also want to consider a charitable trust or a foundation.

Charitable trusts are irrevocable, so once assets are put into the trust you cannot use them for any reason not specifically outlined in the trust.  The benefit is that you are able to donate appreciated property, receive an immediate tax deduction, and avoid capital gains on the sale.  There are two main types.  A Charitable Remainder Trust provides income to the charitable donor for life or some other specified period and at the end of the period the remaining assets go to the designated charity.  A Charitable Lead Trust is the opposite.  Income goes to the charity for a specified period and the remaining assets revert back to the donor or another named beneficiary.  You will need an attorney to draw up the trust and having a professional trustee is often recommended, so this is best for more complex assets and larger donations.  If this sounds appropriate for you, you may need to act fast. There is a tax proposal to tax the gains for the non-charitable portion of the trust, notably reducing the tax benefit of this type of donation.

 

Foundations

A family foundation or private foundation can be appropriate for individuals who would like their charitable work to continue long after they are gone, by passing the torch to future generations.  The donated funds are invested tax-deferred.  Unlike other options you have the ability to hire staff, including your own family, to operate the foundation.  Foundations are highly regulated and can be expensive to administer, so they are usually only pursued by families with significant assets.

 

Not all of these strategies will be appropriate for everyone and what makes sense for you one year may not be best the following year, so it’s important to work with your professional team on an ongoing basis. Talk with your financial planner about how this fits into your overall financial plan, to ensure you are balancing your generosity with your ability to achieve your other financial goals. Your planner can also help you narrow down your options, coordinate with your accountant and estate planning attorney, and consider options for taking advantage of higher deductions, such as Roth conversions or realizing investment gains in a lower tax bracket. If you are not currently working with a financial planner, you can learn about the advisors at Merriman at www.merriman.com/advisors.

 

You can download a PDF of this article here.

 

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax or legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.

Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.

 

Where To Start With Estate Settling

Where To Start With Estate Settling

 

Over the 25 years or so that I have been practicing and serving families, one of the crucial points that has surfaced time and again with clients is one that tends to occur after a spouse or family member has passed away, and they seek out our help. Quite understandably, most people have little or no experience in settling an estate and essentially do not know what needs to be done. There are a myriad of actions to be accomplished, each one of them important, and no one knows in what order tasks need to be completed, let alone how to weave through the legal dynamics. So what can we do to help?

About 10 years ago, I finally grew so frustrated with not being able to help several of my client families settle estate matters after a death that I decided I was going to solve the matter myself. I went back through all of my estate planning books to seek out as many action items as I could locate. In addition, I went through dozens of other legal and financial websites to gain as much knowledge as I could. The problem was not in locating information on estate settling but rather not to drown in the vastness of it. Ultimately, I realized that my task was to consolidate and distill as much information as possible into a short and clear format that we could share. The result was a composition of knowledge written in simple English that went through peer review multiple times to create a master end-of-life checklist.

The “Checklist: After a Death Occurs” was constructed to assist our clients and their families so they could understand most of the basic estate settling matters that must be pursued after a loved one has passed. The document is arranged in a priority-driven format, so from top to bottom, front to back, the most important estate marshalling activities are listed first. The current iteration is about six pages long and contains an additional short checklist at the end for a surviving spouse.

There is also a third checklist that we created in addition to these main two. The third list is a pre-mortem checklist for someone who is ailing or terminally ill, designed to assist family members with estate matter topics while the individual is still alive. We hope these tools will be useful to you and your family, and we would love to hear back if they help.

 

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

Filling the Various Estate Planning Roles

Filling the Various Estate Planning Roles

 

At Merriman, we partner with our clients to ensure no stone goes unturned with respect to their complete Wealth Management plan. One of the more complicated issues clients face is crafting and updating their estate plans.

This is not surprising as estate planning preparation and upkeep come with difficult questions—both qualitative and quantitative. The burden of these questions can often drive folks to put off the discussion and leave their plan vulnerable. The purpose of this brief post is to let you know that it does not have to be so difficult.

This article serves as a starting point to initiate the estate planning discussion. It is a discussion of the various estate planning roles you need to fulfill. Like most things, having a process and a plan will lead to peace of mind and planned success.

Let’s start with the various roles that need to be filled:

  • Guardian
  • Trustee
  • Financial Power of Attorney (POA)
  • Medical POA
  • Executor/Personal Representative.

One commonality for all these roles is proximity. If you can find someone close, that is a prudent solution. For example, in selecting a guardian for your children, it is best they are local to avoid changing schools, establishing new friends, etc. Similarly, if there is property to sell in your estate, it is best to have a local executor, as opposed to having someone across the country who is unfamiliar with the local scene and would have to travel extensively to manage the estate.

A Guardian is someone who looks after and is legally responsible for your children until they are adults. This person should embody all the traits you would want in someone who will take care of your kids in the event you are no longer around. Often, this is a family member with close proximity (as outlined above). Keeping your kids in their current environment is so important, especially when they are already trying to deal with your absence.

A Trustee is the person who has control or powers of administration over the trust assets in your estate. The trust assets do NOT belong to the Trustee. Rather, the Trustee is safeguarding the assets per the terms of the trust and for the trust benefactors.

The role of Executor “triggers” if one or both spouses pass away. This person’s job is to fulfill all of the requests and wishes as outlined in your will. This person should have high financial competence and a good understanding of what you own and how you want your assets distributed. Technically, they will follow the wishes as outlined in your estate plan. However, we advise clients to draft a less formal letter of instruction to confirm your wishes are carried out as precisely as possible.

The next two items are in effect during your lifetime. A Financial POA grants that person the ability to make financial decisions on your behalf if/when you no longer have the ability to do so of your own accord. A Medical POA functions the same but is related to medical decisions. Both of these roles should be set up with your initial estate plan.

If you have already crafted your estate plan, take a few minutes to consider who is currently filling these roles. Are they still the right person for the job? If not, who is better suited? If changes are required, let your estate planning attorney know and get to work on updating your documents. If you have yet to complete your estate plan, consider who would best serve in the aforementioned roles. If you already have an estate planning attorney, get to work on crafting your plan. If not, let us know, and we can connect you with one.

Another tool you can use to begin to formulate your plan is our “After Death Occurs” checklist. While this outlines a post-mortem list, it also serves as a great tool to get you thinking about the roles described above.

At Merriman, our goal is to ensure clients’ plans are buttoned up from top to bottom. While we emphasize financial planning and investment portfolio management, we also partner with our clients to ensure they are covered in the areas of estate planning, taxes, and insurance. Ensuring your estate plan is taken care of will provide peace of mind on your journey to Investing Wisely to Live Fully.

For additional reading on this topic, check out our ebook The Transparent Legacy for advice on conversations you must have with your loved ones before it’s too late.

 

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.”

 

Inheritance Tax Compared Across U.S. States: Who Pays What?

Inheritance Tax Compared Across U.S. States: Who Pays What?

Photo by NeONBRAND on Unsplash

 

When a person dies, depending on how much they were worth and where they lived, the assets they leave behind could be subject to inheritance and estate taxes. The vast majority of estates aren’t large enough to be charged any federal estate taxes—as of 2021, these only apply if the deceased person’s assets total $11.7 million or more.

Furthermore, most states have neither an inheritance tax, which is assessed against the beneficiaries receiving the inheritance, or an estate tax, which is calculated upon the estate itself.

The number of jurisdictions upholding such levies has even been dropping as a result of political opposition, which has branded them as “death taxes.” Nevertheless, a dozen states (plus the District of Columbia) currently continue to tax estates, whilst six still levy inheritance taxes. The state of Maryland currently still collects both.

State taxes, as with federal estate taxes, are only collected above certain thresholds. And even above those, you may be spared depending upon your relationship with the deceased person. It is very rare for descendants or surviving spouses to pay this levy.

It’s therefore relatively uncommon for inheritances or estates to actually be taxed, but there are some exceptions.

 

Estate Taxes

For tax purposes, both state and federal levies are assessed upon the fair market value of the estate and not what the deceased would have originally paid.

Anything that is bequeathed by an estate to a surviving spouse is not included in the total estate amount and is therefore not subject to estate tax. This spousal right to leave any discretionary amount to one another is called the “unlimited marital deduction.” However, upon the passing of the initial surviving spouse, any subsequent beneficiaries may be liable for estate taxes, should the estate exceed the exclusion limits. Other deductions—such as debts or charitable donations—are also exempt from being included in the final estate calculation for tax purposes.

 

Estate Taxes at a Federal Level

As of 2021, the Internal Revenue Service (IRS) requires that any estates with combined prior taxable gifts and gross assets exceeding $11.7 million must pay the relevant estate tax by filing a federal estate tax return.

Any portion above the $11.7 million threshold will then be taxed at the highest federal statutory estate taxation rate of 40%. In reality, however, there are various loopholes that allow a skilled accountant to bring the effective taxation rate to well below that.

 

Estate Taxes at a State Level

If you live in a state that imposes an estate tax, you are more likely to be liable for these than you are to pay federal estate taxes. The exemptions applicable for state and district estate taxes are less than half of those held at the federal level. Some are as low as $1,000,000. An estate tax is assessed within the state where the decedent resided at the time of death.

One of the states that doesn’t have an inheritance tax or estate tax is Washington. The market is red-hot right now in many cities across the state, with homes for sale in Seattle and property in Spokane in high demand. Therefore, no inheritance tax is, at least, great news for those who are passing down property in any of the cities there.

Here are the jurisdictions that do impose estate taxes. You can click on the individual state for further information regarding that state government’s estate taxations.

 

State Inheritance Taxes

Whilst there are no federal inheritance taxes, some select states do still tax some inherited assets

Here are the jurisdictions that currently impose inheritance taxes. You can click on the individual state for further information regarding that state government’s inheritance taxations.

Whether or not an inheritance will be taxed and at what rate will depend upon its value, the beneficiary’s relationship to the deceased person, and the prevailing rates and rules where the beneficiary resides.

Life insurance payable to the deceased person’s estate is usually subject to estate taxation, but life insurance payable to a beneficiary is typically not subject to an inheritance tax.

Should an inheritance tax be due, it is applied only to any sum exceeding the exemption, as with estate tax. Above those thresholds, the amount is usually assessed on a sliding scale. These rates usually rise to between 15–18%. Both the rate you are charged and the exemption you receive may vary depending upon your relationship to the deceased.

As a general rule, the closer the relationship is between decedent and beneficiary, the lower the rate of taxation will be. Surviving spouses are exempt from paying inheritance tax in all six states that currently uphold inheritance taxes. In New Jersey, domestic partners are also exempt. Descendants only pay inheritance tax in Nebraska and Pennsylvania. Inheritance tax is assessed within the state that the inheritor resides.

 

Final Thoughts

Estate and inheritance taxes can be complex and subject to frequent change. For most, engaging with them occurs during particularly stressful periods of our lives, so it can help to do your research and be prepared.

Monitor any changes to the laws that may affect you. You and your family may even consider financially preparing by setting aside a fund to help in offsetting any tax burden to come. It may also be prudent to meet with a lawyer, CFP, or CFA to plan your estate whilst minimizing the amount of tax your beneficiaries will have to pay when they eventually inherit it.

 

 

 Written Exclusively for Merriman.com by Madison Smith
Madison Smith is a personal and home finance expert at BestCompany.com. She works to help others make positive financial stride in their lives by providing expert insight on anything from credit card debt to home-buying tips.

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and it is not intended to serve as a substitute for personalized investment advice. Facts presented have been obtained from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.

 

 

 

 

Saving for College? Here are 5 Accounts You Can Start Using Now

Saving for College? Here are 5 Accounts You Can Start Using Now

 

It’s true what people say about having kids: the days are long, but the years are short. Sometimes our busy, ever-changing lives leave us wondering: “Where did the time go?” When it’s time to send your child off to college, you may feel sentimental, but there’s no need to feel unprepared. With so many options to save for your child’s future, you’ll be able to find the one for you.

 

Invest in a 529 Plan

When saving for your child’s future, 529 Plans are a popular choice. These savings accounts offer tax advantages similar to a Roth IRA. When your child is ready to go to college, you can make tax-free withdrawals to pay for qualified education expenses.

Benefits

  • You can open a 529 plan as soon as your child is born. This allows the money to grow over a longer period of time.
  • The funds apply to both undergraduate and graduate programs at any two- or four-year institution.
  • They allow up to $300,000 in lifetime contributions.
  • If your child doesn’t go to college, you can change the beneficiary.
  • Some K–12 expenses may qualify under the 529 plan, such as tuition and fees.

Drawbacks

  • Any funds not spent on qualifying expenses are subject to income tax and a 10% tax penalty.
  • You are required to report withdrawals on the FAFSA if the account is owned by someone other than the parent. This could negatively impact the student’s eligibility for financial aid.

 

Consider a Roth IRA

Roth IRAs are typically used for retirement savings, but you can also use them to save for your child’s future. You can’t take distributions on Roth IRAs penalty free before 59½. However, any account open for at least five years can be used for education, so make sure you open the account no later than your child’s 8th grade year.

Benefits

  • Distributions are tax free and penalty free as long as they are used for qualifying education expenses.
  • After graduation, the account can still be repurposed as your retirement account.
  • The value of the retirement account is not included in a FAFSA application.

Drawbacks

  • Roth IRAs have annual contribution limits of $6,000. An average year at a university can cost upwards of $20,000. So, it would be difficult to save enough money with a Roth IRA account unless you start early.
  • Remember, any withdrawals from a Roth IRA are considered income, which will be reported on a future FAFSA. This might impact your child’s chances for financial aid.

 

 

Coverdell ESA

A Coverdell Education Savings Account (ESA) is a great alternative to a 529 plan. It is a tax-deferred trust account with high potential for growth.

Benefits

  • Savings can be used for primary and secondary education as well as college.
  • There is more flexibility in what is considered a “qualifying expense.” Parents can use the funds to pay for school uniforms, tutoring, and other K–12 programs.

Drawbacks

  • Annual contribution limits are set at $2,000 per person, per year.
  • You also cannot make contributions after age 18. All funds must be spent before the beneficiary turns 30.
  • There are also income limits on who can contribute to a Coverdell ESA account.

 

 

Custodial UGMA/UTMA

Custodial accounts are another great way to save for your child’s future. With a Custodial UGMA/UTMA, you have the ability to transfer assets to your minor children and enjoy tax breaks.

Benefits

  • When the assets are transferred, a portion of the value of the assets is taxed at the child’s tax rate, and the rest is taxed at the parent’s tax rate.
  • Since this is only a transfer of assets, there are no restrictions on how the money should be spent, other than the benefit of the child.
  • A custodial account allows any asset (not just cash), such as stocks, bonds, art, and real estate, to be transferred to a minor.

Drawbacks

  • Since the assets are owned by the child, parents have less control over how the money is spent.
  • These accounts will have to be reported on a FAFSA, so there is a chance for them to negatively impact financial aid.

 

Savings Bonds

Savings bonds are issued by the US government and can be purchased from a financial broker or directly from the US Treasury. They may be a good option for more conservative investors, at least for a portion of your investment strategy.

Benefits

  • Bonds are low-/no-risk investments since they are backed by the federal government.
  • If you invest in Series EE or Series I bonds, interest earned is tax free when funds are used for qualified education expenses.

Drawbacks

  • Incredibly low rate of return. You’ll need a backup savings plan.

 

When it comes to financial planning, you’ll also want to consider making sure you have your retirement accounts set up first. A certified financial planner will help you decide which account is the best option when saving for your child’s future. He or she can monitor all of your accounts and suggest any changes needed to secure a bright financial future for you and your family.

 

 

 

 

Written Exclusively for Merriman.com by Lyle Solomon

Lyle Solomon has considerable litigation experience as well as substantial hands-on knowledge and expertise in legal analysis and writing. Since 2003, he has been a member of the State Bar of California. In 1998, he graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, and now serves as a principal attorney for the Oak View Law Group in Los Altos, California.

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and it is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. .  Facts presented have been obtained from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.

Summer Jobs and Loving Grandparents

Summer Jobs and Loving Grandparents

 

One of the great things I get to experience as a financial advisor is that many of my clients have achieved such good financial security that they are able to help their relatives financially. One of the best examples is grandparents wanting to help their grandchildren. The usual starting place for grandparents is helping to build an education nest egg, usually in a 529 plan.

When their grandchildren get older, my clients will often pose the question of how to help them out without just giving them money directly. Below is a typical conversation. Loving parents can be interchanged with loving grandparents with the same effect.

 

Client: Eric, our wonderful 20-year-old granddaughter just finished her second year of college and is doing very well. We are so proud of her. We want to help put her in a better financial position for after college, but her parents do not want us to spoil her. Is there anything we can do for her?

Eric: Does she have a summer job or work while at school?

Client: Yes, she is working at a local nursery tending the plants over the summer. She loves the job as she is a biology major.

Eric: Great! One way you could help her is to fund a Roth IRA for her.

Client: Really?! She can have a Roth IRA?

Eric: Yes. Since she has earned income, she can contribute to a Roth IRA.

Client: How much can she contribute?

Eric: She can contribute up to the amount of income she makes with a maximum of $6,000. Let’s say she makes $2,500 over the summer; she could contribute that amount to a Roth IRA.

Client: That is very interesting. Why would she want a Roth IRA?

Eric: There are a lot of reasons, but the big one is that she will have an account that will grow tax free; and by starting at such a young age, she will have extra years for it to grow until her retirement.

Client: I don’t think many 20-year-old kids these days are really that interested in retirement accounts.

Eric: That’s true, but I like to show the miracle that is compound interest and how small deposits made now can turn into large amounts of money in 45 years at retirement. If your granddaughter were to invest $3,000 for the next five years and earn 7% interest until age 65, she would have over $387,000.

Client: That’s amazing! But still, thinking about retirement is a difficult concept for young people.

Eric: True. Another great aspect of a Roth IRA is that it can help with a first-time purchase of a home. There are certain rules in place to allow contributions, including up to an additional $10,000 of a Roth, to be used for the first-time purchase of a home. A Roth account has a great amount of flexibility.

Client: That is wonderful!

Eric: I have helped many grandparents with making contributions to their grandchildren’s Roth IRAs. Some grandparents will match the contributions their grandchild makes to their Roth IRA to incentivize them to save money. Others will just make the entire contribution as a reward for working a part-time job. Either way, the grandchild will benefit. It ends up being a wonderful legacy that can be used by the grandchild to further their financial situation. Also, it can teach them the benefits of saving money. When they start careers down the road and can fund their 401k, they will have already experienced the benefits, and the education and experience can put them on a great path to financial security. I have received rave reviews from people who have put one of these plans into motion and have seen the benefits.

Client: What about her brother who is 16 years old and working at a grocery store?

Eric: Even better—more time to grow, although an adult will have to act as custodian on the Roth IRA until the age of majority.

Client: How do we get started?

Talk to your Merriman Wealth Advisor if you are interested in looking at Roth IRA options for your children or grandchildren. We can help with the custodial set up and investment recommendations.

 

 

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Nothing in this presentation in intended to serve as personalized investment, tax, or insurance advice, as such advice depends on your individual facts and circumstances. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.