T Nation

Roth IRA Question


#1

I have a Roth IRA that I will leave alone until retirement making yearly max contributions. I am aware that I can only open one up but, I was thinking of opening one up in one of my parents name. I would make the yearly contributions and in 15 yrs when they retire they would either transfer me the whole and be taxed for it or they could "gift" me 14k yearly which would be tax free. Smart move?


#2

I don’t think that’s even possible. It also sounds like something you’d have to justify in court one day, so…


#3

What is the financial situation for your parents? It seems they would be able to qualify for a Roth but contributing because they don’t have the money themselves?


#4

[quote]usmccds423 wrote:
I don’t think that’s even possible. It also sounds like something you’d have to justify in court one day, so…

[/quote]

It might just be one of those tax loopholes liberals are always talking about.


#5

[quote]sufiandy wrote:
What is the financial situation for your parents? It seems they would be able to qualify for a Roth but contributing because they don’t have the money themselves?[/quote]

They both work and have a “shared” Roth IRA under my dads name. I would have another under my moms.

They have the money to open another but, chose not to. Even if they could not afford it, family can gift each other up to 14k a year. I would be legally allowed to make the max yearly contributions for them.


#6

[quote]sufiandy wrote:

[quote]usmccds423 wrote:
I don’t think that’s even possible. It also sounds like something you’d have to justify in court one day, so…

[/quote]

It might just be one of those tax loopholes liberals are always talking about.[/quote]

I’m pretty sure you can’t open a Roth IRA in your parents name.

Edit: It also isn’t a loophole since with a Roth you pay tax upfront.


#7

[quote]maverick88 wrote:
I would be legally allowed to make the max yearly contributions for them.[/quote]

I could be wrong, but I don’t think you can contribute to your parents IRA. Kids, yes. Parents, I don’t beleive so.


#8

[quote]usmccds423 wrote:
I don’t think that’s even possible. It also sounds like something you’d have to justify in court one day, so…

[/quote]

I do not see how. Contributions are already taxed. After they qualify for retirement they are legally allowed to gift up to $14k. If I wanted the whole, everything after 14k would be taxed accordingly.

Seems more like an awesome loop hole.


#9

[quote]usmccds423 wrote:

[quote]maverick88 wrote:
I would be legally allowed to make the max yearly contributions for them.[/quote]

I could be wrong, but I don’t think you can contribute to your parents IRA. Kids, yes. Parents, I don’t beleive so.[/quote]

That is not what I would be doing. I would be giving them money. If they chose to use it to contribute towards their Roth IRA they can.


#10

[quote]maverick88 wrote:

[quote]usmccds423 wrote:

[quote]maverick88 wrote:
I would be legally allowed to make the max yearly contributions for them.[/quote]

I could be wrong, but I don’t think you can contribute to your parents IRA. Kids, yes. Parents, I don’t beleive so.[/quote]

That is not what I would be doing. I would be giving them money. If they chose to use it to contribute towards their Roth IRA they can.

[/quote]

So you are going to gift your parents money, they are going to deposit it in a Roth, then at retirement they are going to gift it back? Why?


#11

[quote]maverick88 wrote:

[quote]usmccds423 wrote:
I don’t think that’s even possible. It also sounds like something you’d have to justify in court one day, so…

[/quote]

I do not see how. Contributions are already taxed. After they qualify for retirement they are legally allowed to gift up to $14k. If I wanted the whole, everything after 14k would be taxed accordingly.

Seems more like an awesome loop hole.

[/quote]

I didn’t say it is tax evasion, I said you might end up trying to explai this in court. There are pretty strict Roth rules and there are strict gifting rules. The IRS could argue this is actually a loan to your parents with an intended payback plus interest.


#12

[quote]maverick88 wrote:

[quote]usmccds423 wrote:

[quote]maverick88 wrote:
I would be legally allowed to make the max yearly contributions for them.[/quote]

I could be wrong, but I don’t think you can contribute to your parents IRA. Kids, yes. Parents, I don’t beleive so.[/quote]

That is not what I would be doing. I would be giving them money. If they chose to use it to contribute towards their Roth IRA they can.

[/quote]

Your OP is confusing then:

“I was thinking of opening one up in one of my parents name. I would make the yearly contributions and in 15 yrs when they retire they would either transfer me the whole a…”


#13

[quote]usmccds423 wrote:

[quote]maverick88 wrote:

[quote]usmccds423 wrote:

[quote]maverick88 wrote:
I would be legally allowed to make the max yearly contributions for them.[/quote]

I could be wrong, but I don’t think you can contribute to your parents IRA. Kids, yes. Parents, I don’t beleive so.[/quote]

That is not what I would be doing. I would be giving them money. If they chose to use it to contribute towards their Roth IRA they can.

[/quote]

So you are going to gift your parents money, they are going to deposit it in a Roth, then at retirement they are going to gift it back? Why?
[/quote]

In the case of the IRS? If so, what does it matter to them? There is no law being broken.

If you are asking why. It would be like a really high yielding savings account.


#14

[quote]usmccds423 wrote:

[quote]maverick88 wrote:

[quote]usmccds423 wrote:

[quote]maverick88 wrote:
I would be legally allowed to make the max yearly contributions for them.[/quote]

I could be wrong, but I don’t think you can contribute to your parents IRA. Kids, yes. Parents, I don’t beleive so.[/quote]

That is not what I would be doing. I would be giving them money. If they chose to use it to contribute towards their Roth IRA they can.

[/quote]

Your OP is confusing then:

“I was thinking of opening one up in one of my parents name. I would make the yearly contributions and in 15 yrs when they retire they would either transfer me the whole a…”[/quote]

Oh no, that is what I would be doing but, wording matters.

I am not legally allowed to contribute directly into the Roth but, I am legally allowed to give my parents money. They can use that money to contribute to “their” account and at retirement they are legally allowed to give me “their” money.


#15

[quote]maverick88 wrote:

[quote]usmccds423 wrote:

[quote]maverick88 wrote:

[quote]usmccds423 wrote:

[quote]maverick88 wrote:
I would be legally allowed to make the max yearly contributions for them.[/quote]

I could be wrong, but I don’t think you can contribute to your parents IRA. Kids, yes. Parents, I don’t beleive so.[/quote]

That is not what I would be doing. I would be giving them money. If they chose to use it to contribute towards their Roth IRA they can.

[/quote]

So you are going to gift your parents money, they are going to deposit it in a Roth, then at retirement they are going to gift it back? Why?
[/quote]

In the case of the IRS? If so, what does it matter to them? There is no law being broken.

If you are asking why. It would be like a really high yielding savings account.
[/quote]

There are potential tax benefit to you so ya, the IRS will care.

Why don’t you just open a tradition IRA?


#16

[quote]maverick88 wrote:

[quote]usmccds423 wrote:

[quote]maverick88 wrote:

[quote]usmccds423 wrote:

[quote]maverick88 wrote:
I would be legally allowed to make the max yearly contributions for them.[/quote]

I could be wrong, but I don’t think you can contribute to your parents IRA. Kids, yes. Parents, I don’t beleive so.[/quote]

That is not what I would be doing. I would be giving them money. If they chose to use it to contribute towards their Roth IRA they can.

[/quote]

Your OP is confusing then:

“I was thinking of opening one up in one of my parents name. I would make the yearly contributions and in 15 yrs when they retire they would either transfer me the whole a…”[/quote]

Oh no, that is what I would be doing but, wording matters.

I am not legally allowed to contribute directly into the Roth but, I am legally allowed to give my parents money. They can use that money to contribute to “their” account and at retirement they are legally allowed to give me “their” money.[/quote]

That sounds more like a loan to me.


#17

[quote]maverick88 wrote:
I have a Roth IRA that I will leave alone until retirement making yearly max contributions. I am aware that I can only open one up but, I was thinking of opening one up in one of my parents name. I would make the yearly contributions and in 15 yrs when they retire they would either transfer me the whole and be taxed for it or they could “gift” me 14k yearly which would be tax free. Smart move?[/quote]

At the simplest, you are proposing to take advantage of a tax benefit your parents are not using. Namely, you wish to take advantage of the tax free earnings and withdrawals of the ROTH IRA your parents are not using.

The benefit is clear so what about the disadvantages?

  1. If it is conducted at arm’s length and no written reciprocation in the transaction then the IRS has nothing to disallow the structure. So gift money to the parents, they open the ROTH, then at some point in the future they withdraw the money and gift it back to you. If the transaction is documented and your parents are required to return the money to you then you have a problem. You sound aware of this and will not document it. (You can look up “step transaction” + IRS or “structured transaction” + IRS and find out why this is a problem if documented.)

  2. I would watch your involvement in the investment choices of the parent’s IRA. i.e. You ask your parents to choose the investments and they guide those choices rather than you choose or trade directly in the account.

  3. The asset is clearly theirs and they can do with it as you wish. Hopefully you are on good terms and will remain that way. Also, although retirement plans are exempt in a bankruptcy estate, not so sure about attachment from other (tort) creditors. There could be potential for risk of loss.

  4. I don’t know if other heirs, but if your parents die intestate (without an estate plan) you could lose part or all of their ROTH. Normally, ROTHs go to the designate beneficiary on the ROTH enrollment form, but if this is lost for some reason. Small risk, but worth noting.

  5. Not a risk, but a note. You sound relatively savvy on investing and tax planning. I always recommend clients stuff their ROTHs with guaranteed taxable income producing investments, i.e. CDs, bonds, and preferred dividends. You don’t want to put any risky investments in a ROTH. Pre-tax IRAs, 401ks you should take a bit of risk since you are playing with the governments money to a degree (the pre-tax element). High risk investments trade directly to benefit from the losses. Although you will pay the highest tax on short term capital gains, you can net those against losses. You lose in a ROTH, you just lose.


#18

What is considered a gift?
Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes

Not only would you recieve full consideration in return, but you would also conceivably have a gain.


#19

[quote]usmccds423 wrote:
What is considered a gift?
Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes

Not only would you recieve full consideration in return, but you would also conceivably have a gain.[/quote]

You’re taking the term gift here too literally, its more of a “gift”.

So far I don’t see a problem with this plan.


#20

[quote]sufiandy wrote:

[quote]usmccds423 wrote:
What is considered a gift?
Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes

Not only would you recieve full consideration in return, but you would also conceivably have a gain.[/quote]

You’re taking the term gift here too literally, its more of a “gift”.

So far I don’t see a problem with this plan.[/quote]

Lol, well maybe you can represent him in tax court if the need should arise.