Gifting Yearly Roth Contributions for Inheritance

[momoney]

Is gifting your children yearly Roth contributions a better strategy than leaving them a big inheritance?

 

[EastWest Gal]

I think it is. However, your children can only put into the Roth the amount they earn up to a maximun of $7000. I'm gifting taxable ETF funds directly into DS's taxable account at Schwab. He pays taxes on the capital gains if he sells, but it gives him quick access to funds if needed, such as a down payment on a house or a new car. I never have to pay capital gains, and right now he is in the 12% tax bracket so he will pay nothing unless he sells a lot of the funds.

So for us, that is a better tax strategy for all of us. We have more in the taxable account than in the IRA.

 

[rodi]

It's a strategy... But I didn't think you can make a blanket A is better than B judgement.

There are lifetime gift allowances to be considered.

Age of the kids to be considered.

I "matched" my kids' Roth contributions when they got W2 jobs. I'll do that through college (both are still in college). This is to encourage them to contribute to their Roth's.
I also plan on helping them with part of their diem payments on their first homes... Roth doesn't help there.

 

[pjigar]

That is our strategy once DD has a W2 job: Gift appreciated shares in kind to her brokerage account. The gift only comes if she contributes equal amount in Roth IRA (or any other retirement account for that matter). I call it 100% match from Bank of Dad.

PS: Our plan has dual benefit:
1. We "transfer" the capital gains tax responsibility of the shares we gift to DD. The large appreciation on these shares acts as a deterrent in case DD is tempted to cash out gifted shares.
2. DD gets discipline to contribute for retirement. All retirement accounts come with their own set of deterrents.

 

[momoney]

That is our strategy once DD has a W2 job: Gift appreciated shares in kind to her brokerage amount. The gift only comes if she contributes equal amount in Roth IRA. I call it 100% match from Bank of Dad.

That's a great incentive and really helps your daughter plan her future.

 

[Alan]

Is gifting your children yearly Roth contributions a better strategy than leaving them a big inheritance?

Just being having this type of conversation with our daughter this week. She is in the middle of a 17 week paid sabbatical and absolutely loving it so she is hoping to retire in 7 years at age 50. We have been gifting enough money for a few years now every month to her and her brother to bolster their retirement savings so they can retire in their 50s like us should they choose to do so. If we make it to anywhere near our life expectancy then any big inheritance will arrive when they are in their 60s or close to it.

 

[Koolau]

I think it is. However, your children can only put into the Roth the amount they earn up to a maximun of $7000. I'm gifting taxable ETF funds directly into DS's taxable account at Schwab. He pays taxes on the capital gains if he sells, but it gives him quick access to funds if needed, such as a down payment on a house or a new car. I never have to pay capital gains, and right now he is in the 12% tax bracket so he will pay nothing unless he sells a lot of the funds.

So for us, that is a better tax strategy for all of us. We have more in the taxable account than in the IRA.

It's a strategy... But I didn't think you can make a blanket A is better than B judgement.

There are lifetime gift allowances to be considered.

Age of the kids to be considered.

I "matched" my kids' Roth contributions when they got W2 jobs. I'll do that through college (both are still in college). This is to encourage them to contribute to their Roth's.
I also plan on helping them with part of their diem payments on their first homes... Roth doesn't help there.

The gift allowances shouldn't be an issue since funding even $7K would not require reporting.

We've been doing the Roth-for-the-kids for some time. But, over the years, we've run into some "issues" such as one kid made too much to contribute for a while. Then another kid made virtually no money for a while. Yet another just wanted the cash - and we said "fine" for one time - but never again. Our "deal" was payments stopped the moment they cashed in the Roth (without first running the reason past us - for instance down payment on a house would be acceptable to mom and dad.) YMMV

 

[4legsgood]

I gifted to my daughter's Roth while she worked in high school and college for the boost from an early start in investing and also taxable stock and i-bonds. Now that she's an adult I consider her finances her business and I occasionally gift cash for fun stuff.

I am converting much of my T-IRA to Roth to be a better inheritance for her which is not such a complicated think with high state (WA) estate tax.

 

[RE2Boys]

When my boys were students, high school and college, I matched whatever they contributed. After graduation, we gave half the allowed Roth contribution. Last year we gave the equivalent of the whole allowed contribution, but removed any strings, it became a gift for them to do with as they please, they are adults now and must make their own decisions. How much we gift in the future is yet to be determined. I suspect it will be at least the max allowed Roth. Since they each got their first W2 job at age 15 and are now 25 and 27, they've really seen their Roth's grow.

 

[SecondCor521]

I'm not sure if this is more of a "match your kids' Roth question" or "when to leave kids an inheritance" question. Probably both, but I'm going to comment on the latter.

There are good reasons to do it both ways. Off the top of my head:

Reasons to gift now

1. You can enjoy watching them use it.
2. You can see how they use it as input to future gifting decisions.
3. You are there to help train and advise them on how to manage wealth.
4. Shifts capital gains out of your NW to them.
5. Shifts future gains out of your NW if you might have estate tax issues.
6. It can spread out inherited traditional IRA tax consequences to lower the marginal tax rate hit.

Reasons to gift later

1. No concern about Economic Outpatient Care.
2. You keep the money in case you need it for long term care, a serious illness, large charitable bequests, or if you want to leave it to someone else.
3. Step up in basis on taxable assets (taxable investments, house).
4. Some assets aren't very giftable, such as IRAs and houses.
5. Preserve tax-deferred / tax-free growth as long as possible on IRAs.

There are probably more reasons I'm not thinking of right now.

I've done both the Roth matching and current gifting, which I am ramping up. I also am fairly confident that I will disclaim some of my inheritance from my Dad to my three 20-something adult offspring because of the reasons listed above.

 

[Highbeam]

Just a few years of max roth IRA contributions when the "child" is in their early 20's, then forgotten, can make them a multimillionaire at FRA. As parents nearing retirement, that 7000$ isn't doing us nearly as much good.

 

[RunningBum]

I've done both the Roth matching and current gifting, which I am ramping up. I also am fairly confident that I will disclaim some of my inheritance from my Dad to my three 20-something adult offspring because of the reasons listed above.

Does he list you with "per stirpes"? If so, then it would fall to your offspring. If not, wouldn't it go to the other beneficiaries (unless you are sole)?

I'm facing this with my aging parents. I tried to get an insurance policy changed but the agent wasn't responsive. Said I could take the funds and gift them to my son. But I already max out the gift limit before having to report gifts. My aunt recently died and left a small inheritance to the 5 of us siblings. I disclaimed that and asked my 4 siblings to gift my share to my son, which they did. I can probably do the same with part of my parents' money, which isn't that much, but the insurance check will come to me. The amount is not that much to me, but my son pointed out, it would be to him. Lest anyone think he sounded entitled to it, I didn't take it that way. It was just a factual statement.

 

[Koolau]

But I already max out the gift limit before having to report gifts.

As mentioned above, this isn't a big deal. In essence, it reduces your tax-free inheritance once you pass. Unless you're close to the limits at time of death, this has no effect.

 

[SecondCor521]

Does he list you with "per stirpes"? If so, then it would fall to your offspring. If not, wouldn't it go to the other beneficiaries (unless you are sole)?

Yes, he does. He has three children, each of whom has three children, so nine grandchildren. I asked him a few years ago and confirmed with him that his preference was that, if any of his children were to predecease him, he would want that deceased child's share to go to his grandchildren by that deceased child. So that is how his beneficiaries are set up - 1/3 to each kid per stirpes.

It has the added benefit that my preference to disclaim should work the way I intend it to.

And my understanding matches yours: were I to disclaim without "per stirpes", the disclaimed assets would go to my siblings, not my children.

 

[Healthy Lifestyle]

I have about $25,000 in a stock sitting in a taxable acct. this stock was purchased ~20 years ago and I don’t have actual cost basis.

Will taxes be an issue for me or him, if I gift this to my son without the cost basis?

 

[cathy63]

I have about $25,000 in a stock sitting in a taxable acct. this stock was purchased ~20 years ago and I don’t have actual cost basis.

Will taxes be an issue for me or him, if I gift this to my son without the cost basis?

Does this have to do with the topic of the thread somehow? Are you thinking of having your son contribute the shares direclty to his Roth IRA, because that's usually not possible.

Assuming he would sell the stock and contribute the cash, then your son does need to know the cost basis. Since it's a gift, your basis and holding period carries over to him and he'll owe long term capital gains tax on the profit. You can look up historical stock prices at finance.yahoo.com. Make your best estimate of the period when the stock was purchased and pick a reasonable closing price from that timeframe.

If you and your son are both single, then you'll also have to file a gift tax form if you give him the entire $25K in one year, since $25K is greater than the exclusion amount. There will be no tax due, you just have to file the form. If one of you is not single, then treat the gift as if half came from each donor or half was given to each recipient and you won't have to file the form. Or make it easier and give him half this year and half next year.

 

[oldtimer]

I have about $25,000 in a stock sitting in a taxable acct. this stock was purchased ~20 years ago and I don’t have actual cost basis.

Will taxes be an issue for me or him, if I gift this to my son without the cost basis?

If you gift stocks in a taxable brokerage account (or paper certificates) while alive, then your son will receive your current cost along with the stock. $25k is over the 2024 gift limit of $18k/person without reporting requirements, so you will need to report the extra amount to the IRS - though no taxes unless you have already used up your nearly 14 million dollar exemption with previous gifts.

 

[Healthy Lifestyle]

Does this have to do with the topic of the thread somehow? Are you thinking of having your son contribute the shares direclty to his Roth IRA, because that's usually not possible.

Thank you Cathy63 as I was thinking of a way to gift to son who could then add to his Roth account.
Also appreciate you and Oldtimer’s comments on the tax rules in general when gifting.

 

[JDARNELL]

We have gifted the Roth amounts we could to our boys while they were in HS and college. Now that they are working we do gift the full amount and intend to continue to do this for the foreseeable future or until a spouse enters the picture. These funds have been invested into SWSTX and are DCAs in each month.

 

[Texas Proud]

I usually do a match of 100% for what the youngest puts into a ROTH... she has some money her GM left her so we move some of that from a taxable account to the ROTH and my match to put in as much as she made during the year.... she does not make that much so the limit is not a problem yet...

 

[Exchme]

We just give money outright to the kids. We've counseled them on setting up Roths and to do Roth 401k contributions at work and even helped them set that up.

The only "control" we would exercise is if markets are not kind and we need the money, we would stop - or if they start living nicer than we do!

 

[Koolau]

We just give money outright to the kids. We've counseled them on setting up Roths and to do Roth 401k contributions at work and even helped them set that up.

The only "control" we would exercise is if markets are not kind and we need the money, we would stop - or if they start living nicer than we do!

Our kids have already passed the "threshold" of living better than we do (though their stashes are not quite as big as ours yet.) YMMV