Forget Social Security. Start a Kiddie Roth
If you’re at or near retirement, you’ll almost certainly get the Social Security benefits you’re due under federal law.
That’s because even though the Social Security system is long-term insolvent, you are very special to an important group of people.
Older Americans are the country’s most powerful single voting bloc. Their turnout is higher than any other age group. They pay attention to policies that concern them, and vote accordingly. They show up to town halls, and they speak freely.
Having a wizened granny shouting at you for plotting to take away her retirement money is terrible optics.
That’s why every proposal to “reform” Social Security exempts people born before a cutoff date calculated to keep older voters happy. They’ll get their Social Security.
But what about their grandkids?
The $7,000 Baby
According to a proposal I saw recently, if the U.S. government deposited $7,000 into an individualized retirement account whenever a baby is born, with no further contributions, every newborn would be able to retire reasonably comfortably.
If that $7,000 earns the average projected return of the nation’s public pension plans until our babe in arms is 70, the account will hold almost $1 million. That’s enough for a retirement benefit of $73,000 a year in today’s dollars for 23 years.
There are several problems with this proposal.
Bad things could happen in 70 years. In fact, according to Murphy’s Law, they will happen. Some of those things might disrupt this well-laid plan.
That’s one thing to worry about.
More important, however, is the fact that today’s politicians won’t do this because babies don’t vote. And their parents have low turnout rates in congressional elections. There’s just no political incentive to do anything this clever.
But the underlying principle is sound … and it’s available to you to implement right now.
Social Security, Family-Style
Anybody with an income can open a Roth individual retirement arrangement (IRA). A 14-year-old working her first summer job cutting the neighbors’ grass can do it — no problem. Even if the kid earns just $1,000 over the course of the summer and puts it into her Roth, it will compound powerfully as the years go by.
Of course, no kids do this … at least I haven’t come across any.
Like politicians … like any of us … kids have a powerful bias for the present. They want to use that $1,000 for something cool right now, not to pay for orthopedic shoes and oat bran when they’re 70.
But as a parent — or especially, as a grandparent — you know it’s a great idea. You can feel in your bones how great it is because you’re living right now with the consequences of decisions you made decades ago.
So here’s a nifty idea.
If you are able to do so, help your progeny open a Roth IRA in their name. As they earn income over their teen years and 20s, contribute to it on their behalf.
Federal law determines the amounts of those contributions. First, if your grandchild (for example) earns $3,500 over the summer, you can only contribute up to $3,500 to their IRA. Nobody can put more into an IRA than they earn in a year. Second, you can only contribute up to the IRS maximum, which is $5,500 for 2017.
If you did this for, say, 10 years — from age 15 to 25 — you could ensure that the kid retires a millionaire (assuming, of course, that he or she doesn’t blow the IRA before then, but that’s a different parenting issue).
Let the IRS Fund Your Grandkids’ Retirement
The nifty thing about this little plan is that it can leverage tax laws in a unique way.
Under the tax code, the contributions you make to someone’s Roth IRA are gifts, but they are exempt from gift tax. And as long as they don’t exceed $14,000 in a calendar year ($28,000 for couples), such contributions don’t eat into your lifetime gift/estate tax limit (currently $5.49 million).
And because they are gifts, your “kiddie” Roth contributions aren’t considered part of the recipient’s annual taxable income. So when you contribute to a Roth IRA for a youngster, they benefit twice: first, by receiving a tax-free gift that will grow over the years, and second, by not having to pay the income taxes that would normally be due on Roth IRA contributions.
If you want to be really clever, make your kiddie Roth contributions from your Social Security income … that way, the benighted system will benefit your grandkids even after it’s long gone bankrupt.
Editor, The Bauman Letter
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