Roth IRA's for Infants?

[Guest Richard Paul]

Can a Roth IRA be set up thru a stockbroker by a qualified adult whereby an infant(no earned income) can be the beneficiary and upon death of the adult,say 20 years later, the built up wealth in the Roth IRA remains untaxed and becomes the Roth IRA of the now 20 year old ?

Te 20 year old would continue on for decades building up more tax free wealth in the same Roth IRA he/she was once the beneficiary of.

Than you for your interest.

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richard paul

[John Olsen]

The only beneficiary of an IRA (Roth or otherwise) who can take over the decedent's IRA as "his own" is a surviving spouse. All other beneficiaries must take Required Minimum Distributions per IRC 401(a)(9).

There is still the opportunity for a CONSIDERABLE "stretch out" of tax deferral, but not as much as you outlined.

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John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

[Guest Richard Paul]

Mr. John L. Olsen thank you

so much for your message to

me, Richard Paul, on the

topic of "Roth IRAs for

Infants".( I am mentioning

both of our names because I

am new to using a Message

Board and don't know if it is

necessary).

May I please ask you some

more question.

(1) Are you saying that a

non-spouse, in this case an

infant having grown up, can

inherit the Roth IRA but

unlike a spouse beneficiary,

the non-spouse must take some

form of distribution and

cannot ever make

contributions to that Roth

IRA? By the way, if one

inherits a Roth IRA and is

forced to take some form of

distribution by law, could

that person start up a new

Roth Ira for himself?

(2) In your reply

regarding "stretch-out" you

used the term "tax deferral".

I am confused by he term "tax

deferral" because, with the

exception of possible estate

taxes, is it correct that (a)

when the infant inherits the

Roth IRA he inherits it's

contents totally free of

Federal income taxes, and(B)

that forced distributions of

the contents are also

received by the infant

totally free of federal

income taxes. I am not an

Accountant, but when I think

of tax deferral, I tend to

think that money can grow

free of federal income taxes

for a time, but at some

future time those monies

become subject to Federal

income taxes.

(3) I have just started

reading a very good book by

Mr. Gobind Daryanani titled,

"Roth IRA book: An Investor's

Guide." On page 169(section

8.3.3) he states that there

is a big difference between

the term,"beneficiary" and

"designated beneficiary." If

it is not possible for the

infant to begin making annual

contributions into the same

Roth IRA he inherited, then

my goal would be for the

infant to take the life

expectancy distribution

rather than the 5 year

distribution . So for this

goal is Mr. Daryanani correct

that I should be careful to

use the term, "designated

beneficiary?"

Thank you for your kind

interest..

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richard paul

[John Olsen]

Richard,

Thank you for your kind words. It is not necessary to repeat the identities of sender and intended recipient, unless it's not clear from context.

No beneficiary, save a surviving spouse, may elect to treat an inherited IRA as his/her own. That election would include the ability to make recurring contributions to same.

Having inherited an IRA doesn't preclude one from establishing one's own.

Beneficiaries of ALL IRAs, even ROTH IRAs, are subject to "Required Minimum Distribution" rules. Those rules are VERY complicated. However, there are some EXCELLENT articles on same, right here on the rothira web site. I STRONGLY recommend that you read a few - especially those by Natalie Choate and Barry Picker.

I referred to "tax deferral" in the "stretch out" IRA, because one cannot defer the tax on the GAIN on monies one is obliged to withdraw - because there won't BE any further tax deferred gain on a dollar withdrawn.

"Designated beneficiary" means an INDIVIDUAL (or a Trust, for the benefit of one or more INDIVIDUALS, provided that the Trust meets a number of tricky requirements, such that it is, itself, a "Designated Beneficicary Trust") named NO LATER THAN the IRA owner's "Required Beginning Date". If NO designation is made, there may be a beneficiary, by action of State intestacy laws, or a default to "owner's estate" in the IRA Trust agreement, but that won't be the same thing.

ONLY a "designated beneficiary" gets the opportunity to take distributions over LIFE EXPECTANCY.

If you want to name a minor, you'll need to be REALLY careful. Minors cannot "take" under the law; somebody of age - and invested with the authority and responsibility to act on the minor's behalf - must do so.

Who would that be?

I STRONGLY, VERY STRONGLY, suggest that you consult an attorney who REALLY understands Required Minimum Distributions, particularly as they relate to TRUSTS, before making a decision on this matter.

In addition to Dr. Daryanani's book, may I suggest Seymore Goldberg's "How To Pay Less On Your Retirement Savings" (Lasser paperback)? Goldberg has also written two (to my knowledge) books on the subject for financial advisors.

For really IN DEPTH understanding of this issue, I cannot recommend highly enough Natalie Choate's "Life and Death Planning for Retirement Benefits". Like Cy Goldberg's "pro books" it's not cheap (it's $79 in paperback, with a 1988 Addendum), but IT IS, IN MY OPINION, WORTH ITS WEIGHT IN GOLD. My copy is DOG-EARED (possibly because I have to read something two or three times to get it through my skull).

It's listed on this website, or you can order it directly from Natalie's website, www.ataxplan.com.

Best regards,

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John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

[Guest Richard Paul]

Mr. Olsen may I construct this scenario to verify what I have learned from you and other readings:

A qualified adult, assume age 45, begins a Roth IRA and names an infant as the "designated beneficiary." This qualified adult has no spouse from now until death.

For the next 30 years, the adult packs away $2,000 a year and has tremendous luck in the stock market in this Roth IRA. For 30 years none of the capital gains in this Roth IRA, neither long nor short, are subject to federal income taxes.Right?

The adult never married and dies on the 30th year at age 75 having never taken a dime out of the Roth IRA. The grown up infant inherits the contents of the Roth IRA. 30 years ago the adult wisely set up the Roth IRA brokerage account using the term"designated beneficiary."

Because the grown up infant is obviously not the spouse, the grown up infant must take required distributions.Right? However, the grown up infant gets to take the required distribution over many many years because it will be based on life expectancy of the grown up infant who is only 30 years old.Right? And moreover, the 30 year gets to start his own Roth IRA eventhough he is concurrently taking required distributions of the inherited Roth IRA.Right?

And most importantly of all, every penny of both contributions and earnings in that inherited Roth IRA are being distributed over the many years to the 30 year old totally free of Federal income taxes (but not estate taxes if applicable). Right?

So if I have correctly constructed this scenario, the grown up infant would find himself at age 30 with a Roth IRA that has $60,000 of contributions and lots and lots of capital gains all coming his way over many years TOTALLY FREE of federal income taxes in each and every year of the distribution period. And to boot, at age 30 ,or perhaps many years earlier, his qualifications were such that he started his own Roth IRA.

Mr. Olsen do I understand correctly that when either contributions and/or earnings come out of the INHERITED Roth IRA by way of distribution, they come out TOTALLY FREE of Federal income taxes? Because if this is correct, I remain ignorant of why the phrase "tax deferred" is used when talking about a Roth IRA. For example in J.K. Lasser's 1999 (section 8.19 on page 191) as follows:

In speaking about the advantages of the Roth IRA he says,"The balance of the account not withdrawn during the owner's lifetime may be paid out to the beneficiaries TAX FREE over their life expectancies, thereby providing a substantial TAX-DEFERRED build-up within the plan over an extended period."

Instead of TAX DEFERRED build-up wouldn't it be more correct to say TAX FREE build-up? In your last message to me you also used the term TAX DEFERRED. For a Roth IRA, I am failing to understand what taxes are being deferred when there are no taxes period (except estate).

Thank you for your most sincere interest.

Richard Paul

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richard paul

[Guest ezollars]

Lasser's use of the term tax deferred in that context is in error and, I suspect, resulted from a cut/paste by the author of a similar paragraph about traditional IRAs. In the fact pattern you have given, everything would be tax free rather than tax deferred.

[Guest Richard Paul]

Dear Ezollars,

Thank you so much for your message about the incorrect use of the term "tax deferred" in regards to a Roth IRA whereby the circumstances are such that a distribution takes place totally free of Federal income taxes.

I thought I was right, and I am grateful for the confirmation.

Very truly yours,

Richard Paul

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richard paul

[John Olsen]

Richard,

Not only are your conclusions, in the scenario you present, entirely correct, but there is at least one other significant advantage to this "stretch out" Roth IRA which you did not mention.

IN THOSE STATES which have accorded Roth IRAs the SAME CREDITOR PROTECTION as "regular" IRAs, the 30-year old beneficiary has, not only a LIFETIME of TAX FREE INCOME, but the assurance that this income will be generally exempt from attachment by creditors.

Alas, MANY state "creditor protection" statutes do NOT include ROTH IRA accounts, specifically. Some, like MO, have statutes which make specific reference to IRC Sect. 408. As the ROTH IRA is governed, not by 408, but by 408A - A DIFFERENT SECTION - the creditor protections arguably do not apply to Roths.

It is worth checking YOUR STATE'S laws on "creditor protection" to see if ROTH IRAs are accorded the same protection as "regular" IRAs.

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John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

[Guest Richard Paul]

Dear Mr. Olsen,

After reading and thinking some more about your use of the phrase "tax deferred," I do now understand what you mean. It is that once money comes out of a Roth, it might come out tax free but those monies are no longer being put to work as tax deferred. Right?

By the way, now that I understand the Federal tax treatment as it applies to my scenario, do you know where I might look to learn which States currently subject the Roth to State income taxes.

Wouldn't it be great if Sen.Roth can get thru Congress an increase in the maximum annual contribution to $5,000.

I'm new to the internet and new to learning about the "Roth." You have been very motivating for me. Many thanks.

Very truly yours,

Richard Paul

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richard paul

[Guest Lyric]

Here we go -- this website should answer some of your questions about how state law is applied to Roths:

http://www.ici.org/retirement/state_roth_ira_1098.html

Good luck.

Lyric