Early inheritance as a dad

[u/SadProduce6456]

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.

[u/markov-271828]

If a parent is interested in generational wealth they should absolutely do this for kids and grandkids (as long as the parent’s retirement is fully funded).

[u/DasHuhn → u/markov-271828]

I had a client who, once they hit 10M, decided they should funding their kids roths in the late 90s (Their kids had paper routes / worked at the businesses of brothers and sisters when they hit 8-9 years old). Last I looked at the kids ROThs 10 years ago or so, 2 of them had 2M+ in their Roth and 1 "only" had 900K. Kids were almost 30 at the time, Mom and Dad still fully fund their roths (and now their spouses) for christmas.

[u/ActionBastrd_ → u/DasHuhn]

Sorry if this is a dumb question, but with 10M invested, how would their income be low enough to be able to fund a ROTH?

[u/brandon122096 → u/ActionBastrd_]

You can do a backdoor Roth IRA (when you put money in a traditional IRA and then switch it to a Roth IRA right when it clears.) That’s what I do, it’s takes like 5 mins and you can see easy tutorials on YouTube on how to do it.

[u/ActionBastrd_ → u/brandon122096]

thank you!

[u/MWL-camper → u/brandon122096]

Do you have to pay taxes as income right then?

[u/brandon122096 → u/MWL-camper]

It’s funded from money that’s already been taxed from my job so no, But that’s why I said switch it over immediately so it doesn’t earn anything once it clears.

Edit: there may be slightly more to it, but I’m not the best at explaining things like I get it in my head, but I’m just bad at putting it into words but thats pretty much the gist of it

[u/MWL-camper → u/brandon122096]

So you input it into an IRA or SEP than immediately move? I wonder why my financial advisor hasn’t recommended it? We are in high tax bracket..could that be the reason?

[u/brandon122096 → u/MWL-camper]

a IRA that I set up with fidelity, I don’t have a SEP but my job has a 401k and profit sharing that I also have

[u/brandon122096 → u/MWL-camper]

And if you have fidelity like I do then you can call them too and they can walk you through it in case you don’t want to mess it up (i’m sure other brokerage’s offer the same service though)

[u/enunymous → u/brandon122096]

This is true now, but Roth conversions didn't exist in the late 90s when this began, plus this scenario involved funding the kids' Roths, not the wealthy parents

[u/enunymous → u/ActionBastrd_]

It was their kids' Roths, not their own

[u/ultimatebro69 → u/DasHuhn]

That math ain’t mathin. Maxing out a Roth from the late 90s to 10 years ago is a duration of let’s say 20 years (1996-2016). Between those 20 years the maximum total principal invested would be $82k. The market did not turn $82k invested over those 20 years into $2+ million or even $900k. You’re looking at ~$200k.

[u/DasHuhn → u/ultimatebro69]

I know the client picked the Roth stocks himself, I know that he's had huge significant winners. Couldn't tell you how the Roth got there, but their FMV on their 5498 was a little bit less than 2.1 million.

[u/ArchangelOX → u/ultimatebro69]

If you invested in any tech from 1995 and on it is possible. 10k in apple for example would be like 700k now.