10/27/2011 6:43 PM ET|
Tax law could make grandkids rich
Congress last year enacted temporary changes that allow for a massive estate-tax break through a Roth IRA. As a result, a grandchild could pocket millions, tax-free, over a lifetime.
Sometimes Congress hands out a break that is so generous it seems it must be a mistake. This one's a doozy: The ability to receive a totally tax-free inheritance of $400 million or more.
Thanks to two recent changes in the tax code, investors with huge 401k accounts now have a way to turn them into completely tax-free income for their grandchildren's lifetimes.
This is by far the biggest estate-planning break on record, created even as lawmakers debate over which tax giveaways should be killed to help shore up the federal budget.
"I call this tax break the government's going-out-of-business sale," says individual retirement account guru Ed Slott, who travels the country teaching advisers and accountants how to squeeze benefits out of the Roth IRA. "This is a tax break you could drive 10 Mack trucks through. It's an incredible opportunity to do a totally tax-free transfer of wealth."
This massive estate-tax break was created last year in two steps. First, Congress lifted a $100,000 income restriction on who can convert a 401k or IRA to a Roth IRA, allowing even the wealthiest investors to convert. Then, late in the year, it raised the generation-skipping transfer tax exemption to $5 million until 2013. The GST exemption was previously $3.5 million and was scheduled to drop to $1 million this year before Congress stepped in.
Both of these provisions on their own create possibilities for significant tax savings, upon conversion. But used in combination, the results are exponentially greater.
The Roth IRA has always been on a different playing field compared with alternatives, because it allows gains to be withdrawn tax-free. Money taken out of a 401k, regular IRA or other retirement accounts is subject to income tax rates. Also, the Roth doesn't require that minimum distributions be taken after you turn 70½, as other plans do. So if you don't need retirement plan assets to live on, the Roth preserves it best for heirs.
Not everyone jumps at the chance to convert to a Roth IRA, because you have to pay income taxes on the assets moved into the account. So if you plan to live off of retirement account assets, a conversion may not make sense. But from an estate-planning perspective, when there are decades of gains ahead, the tax bill can be a small price to pay for big benefits down the road.
With the new GST exemption, the estate-planning benefits that can be wrung out of a Roth are eye-popping. Consider an extreme case: A wealthy individual converts a large 401k account to a Roth IRA and names a grandchild as the beneficiary. The grandchild, at age 1, inherits the Roth, whose assets have grown to $5 million. Because of the new $5 million GST exemption, the Roth assets would not be subject to estate tax or generation-skipping transfer tax.
Under Roth rules, an heir must take required minimum distributions, but the distributions can be stretched over a lifetime, and assets left in the Roth can continue to grow tax-free. Based on a 1-year-old's 81.6-year life expectancy and assuming an average annual return of 8%, Slott calculates that the grandchild's lifetime income from the Roth would be $408 million -- "completely free of estate, gift, income and capital gains taxes," he says.
If both grandparents left a big Roth account to the same grandchild, the tax-free inheritance would be almost twice that amount, depending on the age of the grandchild when the second Roth is inherited.
VIDEO ON MSN MONEY
yeah! let's here it for the 1%!
remember 1% are super rich but 50% of congress is part of that club!
I am so tired of the Lobbyist / wealthy looting our country. Congress is completly on the Take. The Republicans do not see a problem with laws / Looting like this. The democrats are no better.
Shame on our "Orgainize Crime System" ... The Congress!!!
This looks like a couple of Congress people got together one night and decided how to do this for their political contributors.
Frederick Michael: "Except that the money would just mess up the grandchild. This is a tragic truth. Give a big chunk of cash to a child and it changes their chemistry in a bizarre way."
.........what are you talking about? This is so misguided. Look at how wonderful people like Paris Hilton turned out.
The original intent of the Roth IRA was to help people who didn't have 401K options, mostly Middle Class and lower income people, save for retirement. This is just another case of how Congress can pervert a good idea for their own greed, just like raiding the SS trust fund. In 2012, think before you vote, and clean house the best you can.
Generational wealth is passed on, for the people who said "I worked hard for my money and I'm going to spend it all myself and my kids and make their own way" Okay fine, but the Kennedy's passed on wealth and taught their children to do for themselves. Most of us are not wealthy enough to leave our grandkids, (not kids) grandkids a significant amount of money, that would help them clear their student loan debts and buy a home.
It would be nice if they actually passed some laws that would help the middle class.
And this tax bill for the rich was passed by a Democrat controlled House and Senate and signed into law by a Democrat President Obama.
Keep in mind that the so called Bush Tax cuts for the rich expired on December 31, 2010. However in December 2010 a Democrat controlled House and Senate passed a bill extending the tax cuts. On December 17, 2010 President Obama signed the bill into law. I have yet to hear anything about the Obama Tax cuts for the RICH.
Of course one hears anything about the Democrat Tax Cuts for the Rich.
Yet another benefit for the 1% given to them by the very people they have purchased through Corporate Greed and corruption.
Then, you hear the constant whine from rich people who have had to "Earn it." Yes, some have earned it, but a lot have "inherited" it. Here is a perfect example.
Oh, for the wish to be able to vote "none of the above" on the presidential ballot and have that outcome win. RepubliCONS protecting the top 1%. DUMBOcrats more worried about giving away entitlements to those who sit at home and do nothing, or forgiving debt they chose to incurr...
Neither side has the nations best interests at heart. So, who needs them?
Roadhouse Blue and RkyMtnMan: You are welcome to put whatever take you wish; however, if you remember your 8th grade civics' a bill can only become law in one of 3 ways. 1. The President signs it, 2. The President takes no action for 10 days, not counting Sundays and 3. The President vetoes the bill and Congress overrides him. If The President signs the bill it becomes law and he much accept ownership. In this case President Obama had a choice and he decided to take ownership and it is time for him and his party members to stop the blame game and accept responsibility for his actions.
So, the comments so far are: It doesn't help me! It's a payout to 'campaign contributors'. It will only ruin the inheritors life. And Why should the government get that money anyway?
To: It doesn't help you. Tough.
To the 'payout' posters: probably right.
To the 'it will only ruin them' posters: Quit hating.
and to the 'The government shouldn't get their money anyway' poster (richard): So Very True! The death tax was nothing short of evil to begin with.
This site is a great example of the class warfare being spun by Obama to try to get re-elected. The top 1% of people pay nearly 50% of the taxes, and the bottom 30 to 40 % ,depending on who you believe,pays nothing. If someone decides he /she wants to work longer and harder than others, take the risks associated with being a business owner, hire people, pay taxes, and build a future for their kids and grandkids, that doesn't make them bad people. What gives the liberals the right to decide what someone's "fair Share" is when it's time to pay taxes? The media forgets to tell you that the "Bush tax cuts" cut the taxes 10% for ALL tax-payers. Of course if you're not paying any taxes you didn't get a cut - That's how it works.
This country's problem isn't income, it's spending. that is what has to change. I know how to fix that- Just reverse the original Boston tea Party principle. Instead of " no taxation without representation", make it "no representation without taxation". If you're not paying taxes you don't vote. We would make exceptions for those unable to work. One last thought- Have you ever gotten a pay check from a poor person?
If you don't want to work long enough and hard enough, spend your money responsibly,live within your means, and accumulate savings over a lifetime, that is OK. Just don't demonize those who do.
Whether intentional or not, opportunities to combine the Roth with the GST exemption are limited. The exemption is scheduled to drop to $1 million in 2013.
So, this big opportunity is only available to those who have the wealth at their disposal right now? This is clearly a vote buying scheme for the 2012 election!
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