Building Your Child’s or Grandchild’s IRA

Many individuals don’t know or understand the benefits of IRAs or saving for retirement.

One of the best ways you can help your children or grandchildren learn about investing for their future is to share your own experience. You know the value of a good retirement nest egg, but kids just don’t think of those things. You probably didn’t either when you were younger. By sharing your experience, by having your child or grandchild start saving early, and by making it fun, they will see the value (Editor’s Note: Ed Slott’s new book, Fund Your Future, talks about this topic and provides a detailed plan to get you there).

You can begin by telling your children and grandchildren about the value of preparing for retirement by making wise investments through a traditional or Roth IRA. A Roth IRA is particularly well-suited for younger individuals. Children or grandchildren are not interested in, or need, an income tax deduction for a contribution to an IRA. A Roth IRA has the ability to grow over the years on a tax-free rather than tax-deferred basis.

As your children or grandchildren mature and are able to understand some of the basics of investing, explain what you have done to grow your own IRA wealth. Your flourishing retirement account may be the best means of teaching your kids the value of smart investing and spurring them to build their own nest egg.

An IRA contribution must be based on the taxable compensation (earned income) of the individual for the year of the contribution. Compensation is income received for personal services rendered. Passive income, such as income from investments, is not considered for the purpose of making an IRA contribution. You can use this chart to see the 2012 IRA contribution limits.

If your child or grandchild has a part-time job, that money can be claimed as earned income. In these cases, you can even make monetary gifts to them, up to the amount they earned during the year, to help them fund their IRAs. Then, for each one, using their Social Security number, open an IRA in their name, designate an appropriate beneficiary and start watching it grow. Yes, they may be young, but each IRA owner should always have a beneficiary. Follow this beneficiary form checklist.

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IN RE: PINK: United States District Court, N.D. Illinois, Eastern Division No. 11 C 6003, 05/10/2012

Michael and Sharon held traditional IRAs at Merrill Lynch until mid-2008. At that time, the two formed an Illinois limited liability company named Reira, LLC. Reira was established as a qualified self-directed IRA under section 408 of the Internal Revenue Code. Its operating agreement designated Michael and Sharon’s IRA accounts as Reira members and Michael as manager.

After the company’s formation, the traditional IRAs were rolled over into the bank accounts opened for Reira. Most of the funds were eventually used for living expenses.

In late 2010, Michael and Sharon filed a joint voluntary petition for relief under Chapter 7 of the Bankruptcy Code. They claimed that the $139,000 left in the accounts initially intended for real estate investments should be exempt from inclusion in the bankruptcy estate because the funds were part of retirement plans.

The petition was denied. The judge held that the exemption does not apply to assets that were held in a retirement account at one time but were removed prior to the filing of a bankruptcy petition.

LESSON TO LEARN:
Just because you put the word IRA in the title of an account and treat the distributions as IRA distributions doesn’t mean you necessarily have an IRA. The account MUST use an IRA agreement document that has been approved by IRS and there must be a beneficiary form as part of the account opening process. The custodian/investment/individual holding the funds must do the proper reporting to IRS of contributions (Form 5498) and distributions (1099-R). If these are not in place, you do NOT have an IRA