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A Big Unknown Secret From Uncle Sam

A Big Unknown Secret From Uncle Sam

With the removal of stretch IRAs from the SECURE ACT passed this year, Inherited IRAs by non-spouses now need to be fully liquidated within 10 years. This can accelerate the amount paid in taxes on Inherited IRAs or, in the case of Inherited Roth IRAs, take away the tax-deferred status at a quicker rate. Originally, a “stretch IRA” was an estate planning strategy used to extend the tax-deferred benefits of an Inherited IRA by a non-spouse beneficiary, such as a child or grandchild. The beneficiary had to take required distributions from the Inherited IRA-but at a rate based on his/her life expectancy, not the original, deceased IRA owners. A Roth IRA is a powerful, tax-deferred tool that can be used for a wide variety of expenses throughout a lifetime. The gift of a Roth IRA is your chance to leave behind a legacy while teaching the importance of saving for retirement.

You will certainly want to discuss this with your CPA, but a potential alternative to transferring wealth with the removal of stretch IRAs may be giving the gift of a Roth IRA. There are many tax advantages to a Roth IRA, and with compounding growth year-over-year, the younger you can begin giving the gift of a Roth IRA, the better. When you’re between the ages of 16 and 25, retirement savings and saving, in general, is one of the last things on your mind. For those just entering the workforce with a summer job, the income generated is likely to be spent on food, fun, entertainment, gas, and car payments. Those who are fresh out of college are opened to a new world of expenses they never had to pay before; between renting or owning a home, payments on a car, health, home and auto insurance, student debt, taxes, and having some money to spend on yourself, saving for retirement may not be the first thing on your child’s mind right out of college.

The IRS prohibits, in the literal sense, gifting an IRA you own personally to a child or grandchild while you are alive. However, the IRS allows each parent and grandparent to gift $15,000 per year to each child and grandchild tax-free up to a maximum of $5.6 million over the lifetime of the parent or grandparent. Anything over $15,000 a year will create a taxable event on the excess. For those that can afford to do so, the gift of a Roth IRA to your children/grandchildren may be one of the best gifts they could receive. As long as your child/grandchild has working income from a job, you can match their working income via a Roth IRA up to the maximum contribution of $6,000 if under the age of 50 (assuming they do not make any IRA contributions themselves and make less than $139k a year or $206k if married and filing jointly as of 2020).

Roth IRAs have tremendous advantages over pre-taxed IRAs, such as Traditional IRAs, for two main reasons:

  1. For Roth IRA contributions, you have already paid taxes. This means you can take out the amount you contributed to the Roth IRA at any time, tax-free!
  2. Once you’ve held a Roth IRA for 5 years, any gains from the contributions you made are no longer subject to having to be included as income for the year. They will be subject to a 10% early withdrawal penalty if under the retirement age of 59 1/2.


  1. Transfer of wealth. This is a great way for parents and grandparents to transfer wealth to a child/grandchild each year with no tax consequences. It is especially important now that the SECURE ACT removed stretch IRAs for Inherited IRA accounts.
  2. Teaching the importance of saving/compounding growth. The importance of saving should be taught at a young age, especially the importance of IRA retirement accounts where gains grow tax-deferred. While saving and investing are briefly taught in school, it’s not something that’s often reinforced at home. As you’ve probably been told or read a dozen times, the earlier you start investing and compounding growth, the greater and faster your investment account will grow in value. Being older and wiser you know this, you’ve seen this, but your children have not. The earlier you start teaching them, the quicker you can show them the power of compounding gains and the importance of IRAs.
  3. Emergency fund. You can use the Roth IRA as an emergency fund if needed due to a job loss or unexpected issues that arise.
  4. Down payment on a house. The bigger the down payment you have, the less you will pay in interest if you take a loan out. If you saved enough, you may not even have to take out a loan!
  5. Pay off a car. You can tap into a Roth IRA to pay off a car or for a big down payment on a new vehicle purchase.
  6. Allows children/grandchildren to max out other tax-deferred accounts. If you are able to max out a Roth IRA for your child/grandchild, this means they have thousands of dollars to potentially use in a 401(k) or HSA if eligible to continue building wealth for themselves.
  7. Pay off tuition. Roth IRAs can be tapped into to pay for the tuition of college. Or, if your child/grandchild is older, they can use a Roth IRA to pay for the tuition of grade school, high school, and college for their child. Click here to learn about the difference between a Roth IRA and 529 plan for educational savings.
  8. Pay off weddings. You can use a Roth IRA to pay off wedding costs which can average $15,000 – $50,000.
  9. Extra disposable income. Having someone max out your Roth IRA may be a pleasant sigh of relief. Knowing your debt is paid off or feeling financially sound for retirement, you can have ease of mind knowing you can be flexible with your money. This advantage of receiving the gifts of a Roth IRA may allow your child or grandchild to do things you wish you had the money to do when you were younger.

As you can tell, a Roth IRA established at a young age can really put your child/grandchild ahead in life. A Roth IRA is a powerful, tax-deferred tool that can be used for a wide variety of expenses throughout a lifetime. Your child/grandchild may not understand the gift early in life, but it will certainly be appreciated when they realize the benefits that a Roth IRA yields in the long-term. The gift of a Roth IRA is your chance to leave behind a legacy while teaching the importance of saving for retirement.

Midland specializes in holding alternative investments such as real estate, promissory notes, futures/forex accounts, cryptocurrencies, real estate, and private stock. Midland will be able to hold your investment and do the necessary record keeping and reporting to the IRS that allows you to invest in alternative assets through your self-directed IRA.

If you have any questions regarding Roth IRAs, feel free to contact us at (239) 333-1032. Visit our website for more information regarding the benefits of Roth IRAs.