Roth IRAs for Kids

If you have a teenage child who works, consider encouraging the child to use some of the earnings for Roth IRA contributions. All that’s required to make a Roth IRA contribution is having some earned income for the year. Age is completely irrelevant. Specifically, for both the 2010 and 2011 tax years, your child can contribute the lesser of: (1) earned income or (2) $5,000.

Modest Contributions at an Early Age Can Amount to Big Bucks by Retirement Age

By making Roth IRA contributions for just a few years, your child can potentially accumulate quite a bit of money by retirement age. Realistically, however, most kids won’t be willing to contribute the $5,000 annual maximum even when they have enough earnings to do so. Be satisfied if you can convince your child to contribute at least a meaningful amount each year. Here’s what can happen. If your 15-year-old contributes $1,000 to a Roth IRA each year for four years starting now, in 45 years when your “child” is 60 years old, the Roth IRA would be worth about $33,000 if it earns a 5% annual return or $114,000 if it earns an 8% return.

If your child contributes $1,500 for each of the four years, after 45 years the Roth IRA would be worth about $50,000 if it earns 5% or about $171,000 if it earns 8%. If the child contributes $2,500 for each of the four years, after 45 years the Roth IRA would be worth about $85,000 if it earns 5% or a whopping $285,000 if it earns 8%. You get the idea. With relatively modest annual contributions for just a few years, Roth IRAs can be worth eye-popping amounts by the time your “kid” approaches retirement age.

Why the Roth IRA Is Usually the Better IRA Option for Kids

For a child, contributing to a Roth IRA is usually a much better idea than contributing to a traditional IRA for several reasons. The child can withdraw all or part of the annual Roth contributions-without any federal income tax or penalty-to pay for college or for any other reason. (However, Roth earnings generally cannot be withdrawn tax-free before age 59 1/2.) In contrast, if your child makes deductible contributions to a traditional IRA, any subsequent withdrawals must be reported as income on your child’s tax returns.

Advice: Even though a child can withdraw Roth IRA contributions without any adverse federal income tax consequences, the best strategy is to leave as much of the account balance as possible untouched until retirement age in order to accumulate a larger federal-income-tax-free sum.

What about tax deductions for traditional IRA contributions? Isn’t that an advantage compared to Roth IRAs? Good questions. There are no write-offs for Roth IRA contributions, but your child probably won’t get any meaningful write-offs from contributing to a traditional IRA either. That’s because an unmarried dependent child’s standard deduction will automatically shelter up to $5,700 of earned income (for 2010) from federal income tax. Any additional income will probably be taxed at very low rates. Unless your child has enough taxable income to owe a significant amount of tax (not very likely), the advantage of being able to deduct traditional IRA contributions is mostly or entirely worthless. Since that’s the only advantage a traditional IRA has over a Roth IRA, the Roth option almost always comes out on top for kids.

Again, these are just a few suggestions to get you thinking. Please call us at (212)387-7880 if you’d like to know more about them or want to discuss other ideas.


Daniel Silvershein Esq. is a Specialist in Tax and Bankruptcy Law

An experienced bankruptcy and tax attorney, Daniel Silvershein Esq. has helped numerous individuals and businesses deal with tax problems and the elimination of debt simply and painlessly through bankruptcy.

Whether you are a private citizen or a business, Daniel Silvershein can help guide you through tax problems with the IRS or help you exercise your constitutional rights to reorganize your finances through the U.S. Bankruptcy laws in the most cost-effective way possible.

As a client of Daniel Silvershein, you’ll tackle tax and financial problems head on and begin to free yourself from burdensome debt. Call 212-387-7880 today for a free consultation.


Tax Treatment of Timeshare Units

As summer comes to an end, no doubt many who paid top dollar at hotels and resorts for vacations are considering timeshare units. One question, however, always comes up: How does this impact my income taxes?

Because the answer depends on whether you rent your unit for at least part of your allotted time, we’ll address each situation separately.

When the Unit Isn’t Rented

If you use a timeshare rather than rent it out (which, after all, is presumably why you bought it in the first place,) the property taxes that are generally buried in your annual maintenance fees are deductible as long as you itemize your deductions.

Mortgage interest is also deductible if you itemize deductions and you choose to make the timeshare your second residence (You can only claim an interest deduction for one second residence). That’s about as far as the tax deductions go. The other items buried in the maintenance fee such as utilities and association membership charges are nondeductible personal expenses.

When the Unit is Rented

If you rent your unit for at least part of the time you’re allotted, things become more complicated. All of your rental income normally is reported as taxable income, but generally only part of your expenses are deductible. The tax law expects you to determine the deductible portion of the expenses based on usage of the unit by all the owners and renters during the year.

However, because it’s typically impossible to get the necessary information from the other owners, most timeshare owners presumably base their calculations on how the unit was used during just their time period. For example, if you own two weeks in a unit, leased it for one, and took your family there during the second week, 50 percent of your expenses (for property taxes, interest expense, maintenance fees etc.) should be deductible up to the amount of your rental income.

Although the other 50 percent of the property taxes can be claimed as an itemized deduction, your remaining expenses are generally nondeductible personal expenses. The remainder of the interest expense, however, could be deductible if you used the unit for personal purposes for the greater of 14 days or 10 percent of the days it was rented during your time period.

Conclusion

As you can probably tell, a timeshare’s tax benefits are nothing to get too excited about. However, that doesn’t mean acquiring a unit is a bad ideal as long as you’re happy with the purchase from a personal standpoint. The lack of significant tax benefits simply means Uncle Sam isn’t going to bail you out if you make a poor decision on which unit to buy.


Financial Problems Can Happen to Anyone, Including the Rich & Famous

If you have financial problems, don’t feel alone. With our economy still in the doldrums after three years, many individuals and companies are feeling the pinch—either from too much debt or problems with the tax man.

Super-star photographer Annie Leibovitz has been in the headlines with her financial woes, putting up her entire body of work in order to borrow $24 million. Actor Nicholas Cage, even with a chain of hit movies, has owned millions in back taxes to the IRS. Actor Stephen Baldwin filed for bankruptcy in New York—owing more than $2 million.

Lenny Dykstra, the former New York Mets and Philadelphia Phillies centerfielder, filed for bankruptcy in California, while Willie Aames, former star of the 1970s and 80s hit television shows “Eight is Enough” and “Charles in Charge” held a garage sale in Kansas City to sell memorabilia from his career. He also filed for bankruptcy.

There is no shame in filing for bankruptcy if creditors are pursuing you day and night, making you afraid to answer your own telephone. Don’t allow debt to take over your life. Call Daniel Silvershein’s law office today to exercise your constitutional rights and begin to take control of your financial situation.