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Legacy-Building, Big Ideas

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We’ve discussed a few ideas with clients this tax season in regard to legacy-building.  A common plan to build a family legacy is to utilize the 529 college-savings plan.  In Oregon, you can deposit up to $310,000 per future student into their Oregon College Savings account.  

It seems pretty ridiculous to give a one-year-old $310,000 today in their education fund, as we would hope it would at least double to more than $600,000 over the next 17 years.  And really, who spends more than $600,000 on post-secondary schooling?  And what if that one-year-old doesn’t attend college for some reason, or they get a full-ride scholarship?  Fortunately, that $6XX,000 college fund can be passed to any immediate family members.  If they pass it on to their children, it will hopefully more than double again to more than $1.5 million by the time their children hit college-age.  You can see how your family tree may never have to worry about tuition costs.

The 529 College-Savings Plan is a neat planning vehicle, but I want to highlight another legacy building idea: the Roth IRA for children.  We have one business-owner client that has been able to contribute to their son’s Roth IRA since he was born (A young Roth IRA account owner can only contribute up to 100% of ‘earned income’, or $5,000, whichever is less).  We are eager to see the value of his account at age 59.5, after which he can take TAX-FREE withdrawals.  Imagine contributing just $500 per year for 20 years; you only have to earn an average return of 8% to accumulate nearly $500,000 by the time Junior reaches age 60.  

Even if you wait until your child begins earning money at a real job, you can help them get a jump start on a tax-free retirement by matching every dollar they earn, contributing it to their Roth IRA.  If Junior works at the local gas station while in high school, for every dollar he earns (likely at a 0% income-tax rate, making a Traditional IRA deduction useless), reward him by allowing him to spend some of it on life experiences, while you fund his Roth for 100% of his earned income, up to $5,000 per year.  

Bonus: Roth IRAs, unlike Traditional IRAs, pass on to heirs income-tax free.  And one final note: IRAs are not reported on the FAFSA, so it does not count against the child for college financial-aid purposes.  What are you waiting for?