Mouprise.com

Forget Social Security: Start a Kiddie Roth

If you’re retired or near retirement, you’ll almost certainly get the Social Security benefits you’re entitled to under federal law.

That’s because even though the Social Security system is insolvent in the long run, you are very special to an important group of people.

Politicians.

Older Americans are the most powerful voting bloc in the country. Their turnover is higher than that of any other age group. They pay attention to the policies that concern them and vote accordingly. They show up at town halls and speak freely.

Having a wizened grandmother yelling at you for conspiring to take her retirement money is terrible optics.

That’s why every proposal to “reform” Social Security exempts people born before a calculated deadline to keep older voters happy. They will receive their Social Security.

But what about your grandchildren?

The $7,000 Baby

According to a proposal I saw recently, if the US government deposited $7,000 into an individualized retirement account each time a baby is born, without further contributions, all newborns could retire reasonably comfortably.

If that $7,000 earns the average projected return of the nation’s public pension plans until our baby in arms is 70, the account will hold nearly $1 million. That’s enough for a retirement benefit of $73,000 a year in today’s dollars for 23 years.

There are several problems with this proposal.

Bad things could happen in 70 years. In fact, according to Murphy’s Law, they Will happen. Some of those things could disrupt this well-laid plan.

That is something to worry about.

More important, however, is the fact that today’s politicians won’t do this because babies don’t vote. And their parents have low turnout rates in congressional elections. There just isn’t any political incentive to do something that smart.

But the underlying principle is sound… and it’s available for you to implement right now.

Social Security, Family Style

Anyone with income can open a Roth IRA. A 14-year-old girl working her first summer job mowing the neighbors’ lawn can do it, no problem. Even if the kid makes just $1,000 over the course of the summer and puts it into her Roth, she will grow mightily as the years go by.

Of course, no child does this… at least I haven’t come across any.

Like politicians… like any of us… children have a strong bias for the present. They want to use that $1,000 for something cool. right nowto avoid paying for orthopedic shoes and oat bran when they are 70 years old.

But as a parent, or especially a grandparent, you know it’s a great idea. You can feel in your bones how good it is because you’re living right now with the consequences of decisions your made decades ago.

So here’s a nifty idea.

If you can, help your offspring open a Roth IRA in their name. As they earn income through their teens and 20s, contribute on their behalf.

Federal law determines the amounts of those contributions. First, if his grandchild (for example) earns $3,500 over the summer, he can only contribute up to $3,500 to his IRA. No one can put more into an IRA than he earns in a year. Second, you can only contribute up to the IRS maximum, which is $5,500 for 2017.

If you did this for, say, 10 years, from age 15 to 25, you could ensure that the child retires a millionaire (assuming, of course, that he or she doesn’t spend the IRA before then, but that’s different upbringing). theme).

Let the IRS fund your grandchildren’s retirement

The nifty thing about this little plan is that it can take advantage of the tax laws in a unique way.

Under the tax code, contributions you make to someone’s Roth IRA are gifts, but are exempt from gift tax. And as long as they don’t exceed $14,000 in a calendar year ($28,000 for couples), such contributions don’t affect your lifetime gift/inheritance tax limit (currently $5.49 million).

And because they’re gifts, your “children’s” Roth contributions aren’t considered part of the recipient’s annual taxable income. So when you contribute to a Roth IRA for a youth, they benefit twofold: first, by receiving a tax-free gift that will grow over the years, and second, by not having to pay the income taxes that are normally owed on Roth. IRA contributions.

If you want to be Really smart, make your child’s Roth contributions out of your Social Security income…that way the ignorant system will benefit your grandchildren even after you’ve been bankrupt long ago.