Category: IRAs

Working with Widows

Advisors who work with widows know that there is often a great deal of confusion after a spouse dies.  Widows are often told not to do anything for a year.  This is terrible advice.  First of all, assets held in joint name have to be transferred into the name of the surviving spouse.  Beneficiaries have to be updated on retirement accounts and insurance policies.   Trusts and wills have to be reviewed.  And investments that were made and understood by the deceased are often not appropriate for the survivor.

The best advice for the widow is to find a trustworthy financial advisor, explain the situation and allow the advisor ro guide the widow through the process of getting on with life.  Of course, it’s easier if the has a copy of the Before I Go Workbook to help.

Open a Roth IRA for Minors

Consider this example: If a child invests $2,000 in a Roth IRA each year from ages 13 to 17, that $10,000 could increase in value to almost $296,000 by age 65, according to research by  T. Rowe Price. That assumes the account earns a 7% annual rate of return. If that panned out, the account could provide tax-free income of $11,800 a year for 30 years.

Tax-free compounding of earnings inside an IRA is a beautiful idea — and a powerful one. The longer you can keep your money invested in a tax-free vehicle, the greater your wealth accumulation. What better way to accumulate a large amount of savings than to start during childhood? When tax-free compounding has more than 50 years to run its course, a relatively modest savings plan can produce substantial wealth.

There’s no minimum (or maximum) age to set up a Roth IRA. And there’s no requirement that the same dollars that were earned be used to fund the IRA. If your child earned money on a summer job and spent it on whatever kids spend money on these days,* there’s nothing wrong with using money provided by parents to establish the IRA. The child has to have earned income, though.

The major impediment to IRAs for children, especially young children, is the earned income requirement. An unmarried person must have earned income of his or her own to contribute to a Roth IRA. The income has to be compensation income, not investment income. And it has to be taxable compensation income.

That doesn’t mean your child has to actually pay tax on the income. If the total amount of income is small enough so your child doesn’t have to pay tax, that’s okay. But your child has to have the kind of income that would call for a tax payment if the amount were large enough.

Smart Ways to Manage a Windfall

Whether you have received an inheritance or won the lottery, before you splurge, take time to consider all the financial angles and come up with a solid plan.  There is a reason most lottery winners wind up broke.  Shady financial advisers may shower you with dubious investment schemes. Long-lost relatives could reappear with hard-luck stories. You might be tempted to quit your job, buy a more expensive house or make other costly decisions that could make your jackpot quickly disappear.  The bigger the jackpot, the greater the chances that you will be the victim of bad decisions.

Many people view a windfall as “found money” and treat it differently than money they’ve earned.  They’re much more likely to use it in a way they’d regret.

Win or inherit enough and banks will lend you enough money to put you in debt.  Yacht brokers will call, as will Realtors will call who have your dream home on the market.

Some financial planners advise waiting  until you give yourself time to come up with a solid plan for how you’ll use the money.   If your inheritance includes an IRA, there are special rules that you will want to consult with financial planners on.

The biggest mistake people make with a windfall is not figuring out how to make the money last.  If the money is big enough, assemble a financial team that includes a financial planner, a CPA (certified public accountant) and perhaps a lawyer.  If you are unaccustomed to handling large amounts of money, a financial planner is the most important part of the team.  You will want to do a search of planners who have a CFP™ (Certified Financial Planner) in their title, and someone with whom you are comfortable discussing your personal financial needs and goals.

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