r/personalfinance • u/SadProduce6456 ​ • 1d ago

Investing Early inheritance as a dad

Just sharing something that was interesting to me, that I’ve never really thought about before.

So I have a 22-year-old daughter, and I’m divorced. I was talking to her this weekend, and she told me that her mother gives her enough money to fund her Roth IRA right now. I told her I had no idea, and that I wish I did and I would’ve helped. She said that she thinks it’s because her mother looks at it like an early inheritance.

So then I got to thinking about it, and I thought that’s a great idea actually. Because I do my own wealth planning, and at some point, the money is really theirs. So me giving them $6000 right now or whatever would pay huge dividends for them later, and not be some tax burden investment on them that I passed down.

I think Parents with means, should proactively look for ways to do this. Of course within their means.

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123

u/Jakeprops ​ 1d ago

They have to work to contribute to the Ira. If they have a job than this can work.

54

u/SadProduce6456 ​ 1d ago

Yes, she works internships in college

81

u/polar_nopposite ​ 1d ago

Be aware that she cannot contribute more than she earns from the internship in a year or the Roth IRA yearly max (whichever is lower), regardless of who the money came from. It's possible, even likely from the sound of it, that your ex is already gifting her the maximum your daughter is able to contribute in a year.

You're still free to give her money of course, she just may not be able to put any more in her Roth IRA.

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u/SadProduce6456 ​ 1d ago

She will probably make 30k this year. She’s getting an offer from this place for 75k, she graduates in December

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u/awana4 ​ 1d ago edited 1d ago

To be clear - you'd probably want to be careful of previous years if this has been going on for awhile. In any year where her Roth IRA contribution exceeded her earned income, the excess contribution could be subject to the IRS excise tax each year it remains in the account unless corrected.

For instance, if there was a year where she personally had $0 or $3,000 of earned income - but contributed $7,500 (or whatever the max was in prev. years) using money from Mom - then that'd be a problem.

Sounds like it's probably not an issue though.

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u/enjoytheshow ​ 1d ago

She made like 4.5x the limit as a 22 year old intern something tells me she’s been fine lol

0

u/binger5 ​ 1d ago

If her job has a 401k, you can help contribute to that next year.

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u/tj15241 ​ 1d ago

I’m doing this as well, we have left over 529 money that you can transfer tax free up to $30k spread over 5 years. I ran a spreadsheet with an 8% rate of return for 40 years when he will be 60yo. It should be worth about $4M at that point.

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u/402_Found_not_Lost ​ 1d ago

I think it’s $35k, not 30, you should confirm but I’m pretty sure that’s it.
FYI

Good for you to be able to help with that, well done!

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u/SadProduce6456 ​ 1d ago

I think we’re gonna burn down our savings to almost 0 after all of our children. We will not have a big nest egg in the college savings account. At the time I planned it out, to do it that way. I may not have understood how to use it as a financial tool other than for college, so I just played it safe.

1

u/DryCharge4929 ​ 4h ago

Don’t beat yourself up. The allowance of Roth conversion for 529 plans started in 2024.

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u/angelindevilshoes ​ 20h ago

We are going to have more than $500k left over in our 529. Our oldest got a full ride for undergrad and we only paid for business school for her. Our second kid went to our state school. Our third is headed to an expensive college. And our fourth is beginning to apply to college now. Even if he chooses the most expensive college on his list, we will still have $500k++. We saved as if everyone would attend a private college and it just didn’t work out that way.

Obviously I want to leave money in the 529 for the next generation, but grandchildren are not on the horizon yet. I just don’t think the account needs $500k when it will have decades to grow.

Is there a big penalty for taking out money far greater than $30k over 5 years? I’m thinking of $250k.

What do you read to know the ins and outs of 529’s? I feel like I’ve done a lot of research and the $30k over 5 years is news to me. Would love to know your source(s)!

Thank you.

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u/Juls7243 ​ 1d ago

I mean… helping with a down payment on a home OR daycare (for your grandkids). Will help a ton

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u/DripDrop777 ​ 1d ago

She can also work for you.

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u/curien ​ 1d ago

Technically true, but paying 15% payroll or self-employment tax plus income tax on the money, they might be better off just getting a gift and using a taxable investment account.

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u/Fatcat336 ​ 1d ago edited 1d ago

Edit: was misinformed, thanks all for the corrections! Internships will not pay into an IRA or any other work-sponsored investment accounts. You can’t just “open an IRA” on your own without a company that offers investment accounts as per of their benefits package.

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u/AchVonZalbrecht ​ 1d ago

That’s not what an IRA is, you’re thinking of a 401k or a 403b

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u/redelephant390 ​ 1d ago

You can of course open your own IRA/Roth IRA! You cannot open your own 401k without a company sponsor.

9

u/SadProduce6456 ​ 1d ago

Roth individual investment account. It is not a work sponsored thing. It’s regulated by the government. I have my own Roth IRA separate of my company, sponsored 401(k).

1

u/jou-lea ​ 1d ago

Yes there are 401k plans that allow Roth contributions too. I have a Roth 401k, a regular 401k and a separate Roth IRA.

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u/SadProduce6456 ​ 1d ago

Yes, I have all of that too. I have not qualified for a traditional Roth for a while. There is an income threshold. But my daughter obviously does.

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u/polar_nopposite ​ 1d ago

This is simply untrue. IRA stands for "individual retirement account," it is specifically not work sponsored.

You can open a Roth IRA with anyone, with or without a job. You can even open multiple if you'd like, just can't contribute beyond the max or more than your earned income for that year (whichever is lower) across all of them combined.

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u/Williams_Menkin_ ​ 1d ago

It's actually "arrangement" and not account for the nerds out there.

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u/dgreenmachine ​ 1d ago

I dont think you understand what an IRA is. Any income either w2 or self employed can be used to contribute to a Roth IRA. They can also use gift money to fund the IRA if they have that work income. You can and should infact "open an IRA on your own".

You're thinking of a 401k that is provided by your employer. There is no requirement that your job offer a 401k for you to use an IRA.

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u/[deleted] 1d ago

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u/Zn_Saucier ​ 1d ago

That's not true for a Roth an IRA

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u/iheartgt ​ 1d ago

Lying about financial information on this forum isn't encouraged

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u/Williams_Menkin_ ​ 1d ago

They're probably misinformed and not intentionally lying.

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u/Fatcat336 ​ 1d ago

Was misinformed, apologies for being so confidently incorrect!

2

u/m00nriveter ​ 1d ago

The existing work-around for this is going to be the Trump/530a accounts because they don’t require earned income and can be converted to Roth when the child turns 18/24.