MAKING CENTS: A gift to last a lifetime

 

With holiday shopping nearing its peak, maybe you can skip the lines and set your sights on a gift that will last a lifetime. Of course, I’m talking financial gifts that go beyond an envelope with a little hole in it to show the face of one of our past presidents.

A gift to a child that is likely to go beyond your lifetime could be a contribution to an IRA. Anyone can put money into an IRA, from a newborn to a retiree. The amount, however, may be limited to the earned income of the IRA account holder. This may be a little tough for a two-year-old, but for a child who is old enough to generate earned income from any type of job, an IRA would make a great gift. You may contribute 100 percent of their earnings up to $5,000 into an IRA account. This amount goes up to $5,500 in 2013. If your gift is for someone over age 50, the IRA contribution goes up to $6,000, and rises to $6,500 next year.

For a child, this IRA account would be best as a Roth IRA. It is likely that the child would not benefit from the deduction available for a traditional IRA, so why set the child up for required minimum distributions and future taxation at age 701/2? As a Roth, the child would never face required minimum distributions under today’s law. Don’t get hung up on the amount. If you can afford $100, then give $100. If you can afford, and the child has earned income at or above $5,000, contribute the maximum.

You are not likely to see the eventual long-term benefit of this gift. To help you understand just how great this gift is, get out a calculator* and figure out what this account could be worth if invested. Forecast it growing at 2 percent, then 4 percent then 6 percent or higher, and you’ll feel the power of just how meaningful this gift will be in the hands of any child 50 or 60 years from now. It is also a reminder of the power of compound interest or gains.

If this IRA is for someone who is not a child and has earned income, but not enough to save and advance their lifestyle, perhaps a deductible IRA would be better. But that choice would be best left up to the recipient and their advisor. Reality, however, is that this person probably does not have an advisor, so you may have to dig a little or involve your financial advisor to make this happen in the most efficient manner.

The mechanics of this can matter. I’d suggest that the gift actually be made outright to the recipient, and that they either write their own check or do a transfer into the IRA account. Remember, the purpose is to make a gift that can last a lifetime, and not send your brother-in-law to Cancun. So your actual involvement in the mechanics of this strategy may be important to seeing this transaction through completion.

 

*Roth IRA calculator: http://www.dinkytown.net/java/RothIRA.html#calc

 

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC.

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