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<p>As of 2013, there is a $5 million exclusion for estate tax. It is 40% after the $5 million. Since most people won’t exceed that amount, the federal inheritance tax is esenitally 0 for most of us.</p>
<p>Many states don’t have any inheritance tax at all. We live in such a state.</p>
<p>Also you get a step up in basis for inherited assets like real estate, stocks.</p>
<p>It is actually one of the best tax deals as of now. Of course, tax laws can change any time.</p>
<p>^^The tax rate in my state (Washington) is now 10% and increases to 19% for estates over 2 million. Add that to the federal tax, and as you say—tax laws can always change–and that’s a lot. Our plan is to live off our savings and pension, without having to dip into our 401K’s or Roths. That would leave them a great deal of money (but we haven’t told them that). I don’t want to have worked and saved so much money for all these years, for 50-59% of most of it to go to the government.</p>
<p>busdriver, you’re right about the magic of compounding. I’m not opposed to a parent funding an IRA, but we feel the best retirement gift we can give our D is teaching her the habit of saving for her own retirement from the get-go. Even small contributions, if made when they’re young, can turn into an astonishingly large nest egg.</p>
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In the first place, yes it IS reported to the IRS so that the IRS knows you haven’t contributed too much, or more than your earned income. So unless you’re prepared to hide this from them forever, they will know.</p>
<p>Secondly, I agree with LasMa that my main goal as a parent is not to fund their IRA but to teach them to do so. What happens if and when they get old enough to start funding it themselves? They need all the information. </p>
<p>If you really want to be generous to your children, fund your own Roth IRAs which you can leave to your children tax free but let them learn to take care of themselves.</p>
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<p>I think first time home buyers can withdraw from a Roth IRA without penalty. (I’m sure restrictions apply.)</p>
<p>My son makes automatic contributions to a Vanguard fund that is tied to his expected retirement year. The date is so far in the future that it doesn’t seem real to me.</p>
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<p>I was a diligent kid… worked when I actually didn’t need to starting when I was 12 (only girl in my city with a paper route), then giving private music lessons, and working in a local retail store. Worked for a deli sandwich business during college. I got a degree in business so I would be sure to get a job, and worked my tail off in the consulting industry in my first 10 years out of college. I was also a saver of a lot of that money I earned. And I think I still learned a lot from my dad’s insistence that I support myself completely (including retirement, etc.). I don’t think you are “teaching” your kids about retirement savings if you are putting the money in for them. I could see maybe a match if you feel you really must do this? But just outright funding their retirement contributions doesn’t seem to teach them about doing their own saving… I know this won’t be popular, but to me this feels like over the line helicoptering.</p>
<p>Maybe it goes back to the “teaching them to fish” idea. I feel like funding my kids’ undergrad education is giving them the foundation they need for success. But the idea is so they can be self sufficient adults on their own after that. They have known this since high school days. D1 picked a social sciences major, but interned and worked and networked her way into a very good job post-graduation. D2 is heading for a STEM career. Some days I feel like I am watching them wobble off on a bike just after the training wheels are taken off – my hands are covering my mouth and my eyes are wide at some of their choices. But I am not going to go hold up the bike any more – they are young adults and need to make own their lives and choices. I can’t imaging funding their retirement accounts or making their house down payments. If I have money to gift them when they get a bit older I may do that. Might contribute some to a grandchild’s 529. But I actually think that window between 22 and about 35 is a really good time to let them make their own way.</p>
<p>I do help with investment advice when asked, though (D1 came to me to ask about where to open a Roth and then how to invest it).</p>
<p>Interesting thread.</p>
<p>I opened a Roth IRA for son a few years ago when he was an undergrad with earned income. Contributed $1000 to open but no more since.
Son was heading at that time to a possible self employed career with no company benefits. It was gift to him to allow him a vehicle for getting some of that loooong term accumulation. The idea was that he would contribute after graduation.</p>
<p>He veered onto a different career path and does now have a 403b that he and employer contribute to. The Roth I opened for him has doubled in value. He can choose to contribute or not. Use for house down payment or not. It’s his now and I don’t regret setting it up for him. Even if he ignores it for 50 years, I figure Vanguard might still be around!</p>
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I see a few reasons ‘why not’ - </p>
<p>Firstly, it’s simply not needed. I’m very confident my kids will do perfectly fine without me having to contribute to their finances in this way. My hope is that they’ll do better than I have (and I’ve done fine with no parental financial support since HS) and I think they’ll achieve that.</p>
<p>Secondly, I think it actually does them a disservice. There’s a point in time in one’s life when they need to be responsible for themselves including in the area of finances and financial planning and this should happen at least by around the time they’ve started in their career. This includes planning for and making their own decisions about what to spend, what to save, ways to save, how to invest, when to make the decision to buy rather than rent and planning for that event, what sacrifices to make, whether that European vacation is really doable, whether they should buy a new BMW versus a new Hyundai or maybe something used, and the list goes on. </p>
<p>From a practical level, yes - there’s the power of compounding, but when you start them up with a retirement fund at age 21, for example, you’re changing the period of retirement investing from somewhere around 45 years to 46 years. This isn’t really significant or necessary. This assumes the individual really starts their retirement savings early and doesn’t simply delay doing so themselves since the parent is doing the contributions - i.e. they spend that $x,000 on something fun since they don’t need to put it in retirements savings since the parents are taking care of that for them. </p>
<p>Of course, there are exceptions. If one’s kid has challenges that the parent thinks necessitates a parent’s continued support, which would likely entail support in ways other than a retirement fund, then that’s a different situation.</p>
<p>“If you really want to be generous to your children, fund your own Roth IRAs which you can leave to your children tax free but let them learn to take care of themselves.”</p>
<p>Definitely, fund your own first. And make that the last thing you cash out, it is the most generous thing you can leave your children.</p>
<p>“Maybe it goes back to the “teaching them to fish” idea”</p>
<p>I think it also depends upon your kids. I’m pretty sure my kids learned the idea about how to “fish” and that they need to take care of themselves since, about…the second grade.There are some things in our family that are intuitively obvious, that we don’t have to lecture about. If you knew my family, you’d understand.</p>
<p>I think it is a far better use of my money to give them 15K to start out their Roth’s during the years that they can’t afford to fund it, than to get them a car for a graduation gift. One gift will merely depreciate, cost them money, and they will probably be able to get along well without it…the other one could make them a huge amount of money. Now obviously, if one thinks that the child hasn’t already learned that they must take care of themselves, then it could be a bad idea. I wish my parents would have done this for me. I funded my IRA when I was 21. Cashed it out when I was 23, paid the penalties, to buy a house. Big mistake to fund an IRA with money you might need. What if my parents had funded it for a couple of years? I wouldn’t be a different person now…just a whole lot richer.</p>
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Well sure. And you’d be even richer if they just handed you $100K per year or if they paid all your bills and rent or house payments or bought you all of your cars. But this isn’t really the point. It’s much better for the kid to make their own sound plans for their life financial plan and make decisions accordingly. There may be some bumps and hurdles but those are learning opportunities.</p>
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Those are some of the planning decisions (and mistakes) one needs to work through themselves and learn from. You may have made that mistake but you managed to recover from it and who knows what other mistakes that educational process prevented?</p>
<p>“Those are some of the planning decisions (and mistakes) one needs to work through themselves and learn from. You may have made that mistake but you managed to recover from it and who knows what other mistakes that educational process prevented?”</p>
<p>I like to say that I wouldn’t change anything about my life, that all the stupid mistakes I’ve made have gotten me to where I am today. And I wouldn’t want to change where life has brought me. But in all honesty, there are some stupid things I’ve done that have really not enhanced my life at all. I could have just as easily read about someone else doing it, and learned the lesson. For example, what have I really learned about some of the idiotic stock trades I’ve done? Buy high, sell low. Had I not bought on greed and sold on fear, I’d have done far better. And have I learned from those mistakes? Probably not.</p>
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I’ll bet you’ve learned from it. Aren’t you a little more discriminating now when you buy stock or avoid the stock market altogether - that some of these financial temptations aren’t worth the risk? The experience might also have caused you to make sure you have a bit more of an assured nest egg in non-risky investments in addition to the more volatile markets. Even if it didn’t affect your behavior overtly it may have subliminally.</p>
<p>Or, you might be someone who repeatedly goes “ow - doh!, ow - doh!, ow - doh!” but I doubt it given what I’ve read in your posts and given that your even in the position to be able to do contributions like this.</p>
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What my kid would “prefer” and what I choose to give may be very different things. Just like when my kid preferred ice cream for dinner.</p>
<p>We’re still helping our D. But we are requiring her to fund her 401K to qualify for the employer match. She understands the importance of such things.</p>
<p>I have plenty of those, “ow-doh!” moments in stock and options trading, though we never played around with too much money. All of our investments are in real estate and retirement funds, where I can’t mess it up too much. Perhaps what I learned is that I stink at picking and timing individual stocks. I have about $6 left in my trading account, though, maybe I can do something with that.</p>
<p>Perhaps the lesson my kids can take away if we fund some of their Roths, is that they are better off getting a gift that will start them on their way to a secure financial future, than a depreciating asset that they don’t really need anyways.</p>
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<p>Pugmadkate - My idea… As your son goes out into the world, give him a cash gift when you can. My dear mother gives each child (and family) a gift each year. Most years, we use our gift for part of our kids’ tuition, but my siblings no longer have tuition to pay, so they will take a trip, buy furniture, purchase new electronics, put a new roof on the house, etc. Mom says she enjoys seeing us use that money and we need it more now than we will when we retire. I agree. H and I look forward to being the givers in the near future. (In our case, H and I have good retirement accounts/plans and will encourage our kids to do the same. D has already started. S is still an undergrad.). ETA: The gift is <$14K.</p>
<p>“I want to learn more about an earlier comment regarding the $14K gift limit and how exceeding it may only trigger some paperwork.”</p>
<p>This is my understanding on the issue, I hope someone will correct me if I’m wrong. You can give whatever amount you would like, to whomever you choose, without triggering any sort of tax. It’s merely that if you give someone over 14K in a year, you have to give the IRS a receipt. You, and your husband could give each child 28K/yr between the two of you, or $56K to them and their spouse (ie 14K per person), without triggering a receipt. And giving the IRS notice is pretty trivial. They add up the amounts given over the years, and when you die, if you have a pretty large estate, that amount is taken into consideration. Right now, the estate isn’t taxed on the first 5.2 million, but if you’ve given away 1 million, the estate is taxed after 4.2 million. I hope I got that right.</p>
<p>Silpat, your miseries when you when you were young seem almost too much to handle. It is incredible that you have persevered and done so well in spite of all that.</p>
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Yes, amounts in excess of the yearly limit count against your lifetime exclusion, which is currently 5+ million, and can be 10+ million if you set things up right. Pretty sure I’ll never have to worry about exceeding the limit, although in years past the limit has been as low as $1 million so who knows what it will be in the future.</p>
<p>Gifts over the annual amount are supposed to be reported on form 709.</p>
<p>I wouldn’t be at all surprised if the non-taxability of Roth IRAs goes away, either.</p>
<p>I don’t know…after paying for college, isn’t that enough? Where does it end?..We do a lot for our kids, but I think I would draw the line at funding their retirement. There are enough entitled kids nowadays, no sure this is a good idea.</p>
<p>Busdriver11 and Notrichenough, thanks for explaining about the gift tax limit. That makes more sense than my earlier understanding of it. It would be nice to enjoy enough of our retirement years to not be leaving >$1MM when we die. </p>