By Michael D. Koppel, CPA, PFS, CITP, MBA
Retired Partner at Gray, Gray & Gray
School’s out! What are your children (or grandchildren) doing during their summer vacation? Going to camp? Hanging around with friends?
How about beginning to plan for retirement?
Retirement for the younger set may be 50 years or more away. But they have a rare opportunity to get a head start on planning and saving now. And you may be able to help them.
If you have ever investigated the choice between opening a Roth IRA or a traditional IRA, you know the decision can come down to whether you will be in a higher tax bracket at retirement age (when you withdraw the funds) than you are at the present time. When it comes to your child or grandchild, it is unlikely they will EVER be in a lower tax bracket than right now.
The “portfolio income” of a child under the age of 18 (24 for a full time student) and the dependent of another (usually a parent or parents) is subject to a federal “kiddie” tax applied to all but $2,100 at the parent’s tax rate. However, this does not apply to earned income. In fact, in 2016 a dependent child’s first $6,300 of earned income is federal income tax free. (If the child has a job, payroll taxes will still apply in most cases, and state tax rules vary widely.)
So the opportunity exists to get a child off to a great start on retirement savings with minimal tax impact.
How powerful is establishing a Roth IRA at a young age? Assume a 15-year-old establishes a $5,500 Roth IRA and allows it to accumulate until they retire 50 years later, at age 65. If we assume a 5% net return after inflation, the investment will have grown to approximately $63,000. Now imagine if investments are made for even more years.
You can help make all this happen through careful gift and estate planning. A parent or grandparent can gift a child up to $14,000 per year without affecting their lifetime exclusion. The lifetime exclusion in 2017 is approximately $5.5 million for an individual, and $11 million for a married couple. This would allow the child to keep the money earned.
Estate, gift and retirement planning requires careful analysis. The financial position, tax rate and requirements of all members of the family need to be considered. Gray, Gray & Gray can help. If you have any questions, please contact our Tax Department at 781-407-0300.