IRA for mom and dad. Withdrawl question....

[Guest downeyjo]

I am going to get my mom and dad a Roth IRA set up for this year 2005 (before they do their taxes). My dad is 58 now, would he have to wait 5 years before receiving distributions or could he start when he is 59 1/2? Thanks for taking time to read this.

[Guest downeyjo]

mom is 56

[John G]

Your parents can always withdraw contributions (not earnings) with no tax consequence.

I am not sure why they would want to withdraw anything so quickly - it hardly leaves time for the funds to grow. Why go through the paperwork and the annual fees if they are planning to draw down the funds immediately? You can always make a gift to either or both parents if you want to provide them funds.

Remember, it is your parents that must meet the income/tax filing status criteria for the Roths. They can only fund a Roth(s) if they have earned income.

[mbozek]

Why do they want to set up Roth IRAs and pay fed tax on the contributions, if they will take distributions by 70 1/2 when they will be in a lower tax bracket. If they are in 25% tax bracket they will pay $1000 in taxes in 2005 on a $4000 contribution. At 6% in after tax earnings for 12 yrs the opportunity cost on the taxes paid will be $2,012. If they deducted the contribution to a regular IRA they would save $1000k in 05 taxes and would earn $1012 in interest which at the 25% tax rate would cost them only $503 in taxes if withdrawn in 12yrs or $302 if they are in the 15% bracket.

Roth only makes sense if they never withdraw any funds during their lifetimes and designate their grandchildren as bene.

[John G]

Mbozek, I think he is talking about funding Roth IRAs for his parents. If so, the parents would not be paying taxes on contributions.... in fact no one actually pays taxes on contributions, but all Roths are funded with after tax dollars. Semantics perhaps, but a distinction in this example. It seems as it the son/daughter want to do this, so it is their after tax dollars.

Perhaps they expect to eventually inherit the Roths when the parents die.

Hopefully we will get another post explaining why they are considering this approach.