Parents must give serious thought to protecting their family
through estate tax planning. While life insurance and trusts
should be a 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 summary of the Roth IRA. A Roth IRA
is an after-tax retirement vehicle that produces huge tax
savings because all tax distributions are tax-free. That
statement can a bit confusing, so lets break it down. The
downside of a Roth IRA is the fact that contributions are
not tax deductible as with traditional IRAs or 401(k)s. The
upside of a Roth IRA, however, is that all distributions are
tax-free once the person reaches the age of 59½. So how can
you 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 should have when that blessed day arrives. Imagine
if you had started saving for retirement when you were 16.
How much bigger would your retirement nest egg be? What if
you purchased Microsoft stock in 1990 and watched it split
eight times? Okay, that was painful example if you missed
that opportunity. Nonetheless, why not do for your child
what you didn't do for yourself?

The fundamental goal of estate planning is to pass as much
of your estate as possible to 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 contribute $4,000 in 2005. That $4,000 is going
to grow tax-free for 43 years and be worth quite a bit. A
ten percent return would result in the account growing to
roughly $200,000 and the full amount would be distributed
tax-free. There are other practical advantages to opening a
Roth IRA for your child.

As a parent, it is vital that you teach your child the value
of money. Opening a Roth IRA gives you the opportunity to
sit down and teach your child the value of saving and
investing, instead of yelling at them to clean their room.
While a parental lecture on the need to save money would
typically 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
must determine if your child is eligible to open an account.
To open an account, your son or daughter must be working at
least part time for an employer that reports their wages to
the IRS. Hiring your child to take out the trash each week
is not going to cut it, nor will this strategy work for your
5 year-old. Many teenagers, however, have summer jobs that
should suffice for IRS consideration. To avoid any trouble,
you should consult with your tax advisor.

A more sublime issue concerns the maturity level of your
child. Keep in mind that the Roth IRA will be opened in
their name. Your son or daughter will have the legal right
to do what they will with the account. It is strongly
suggested that you clearly explain the consequences of
taking money out of the account [taxes, penalties, being cut
out of the will, forced to eat healthy food, grounded for
life, etc.] but the decision lies with them. As difficult as
it is, try to be objective in evaluating how you child will
react to having money sit in an account. If you have doubts,
you should probably investigate other tax saving strategies.

Opening a Roth IRA for your child can be a very effective
means of leveraging your estate. If your child exercises
restraint, your relatively small contribution to their Roth
IRA can grow into a sizeable tax-free nest egg.