Early contributions to a Roth IRA can be moved without penalty
Q: A few years ago, I began depositing $3,500 on Jan. 2 of each year to both my husband's and my Roth IRA accounts. Is this risky, since there is always the possibility that my husband could be laid off early in the year and not earn any income for the rest of the year?
R.R., via e-mail
A: Current IRS rules say taxpayers can contribute $3,000 a year to a Roth IRA provided they have an annual income of at least $3,000. Anyone over 50 can contribute a maximum of $3,500 a year as long as they make $3,500 in income.
The government, however, realizes that unforeseen events can later make you ineligible, such as not earning enough, or earning too much.
Such an event would require a "recharacterization," where the money is moved into an account other than a Roth. The move lets you avoid IRS penalties, says Dorothy Koetz, a certified financial planner in Woodland Hills, Calif. If you encounter this problem, a tax adviser will be able to guide you down the recharacterization path.
Q: I have five grandchildren, and each year since their birth, I have contributed to mutual funds they each own under the Uniform Gift to Minors Act (UGMA). Because of UGMA rules, they won't assume ownership of the funds until age 21. My aim is to at least partially fund their college education. I would like the money to be available for them at age 18, particularly if I'm no longer alive. If the money is used for education, can it be withdrawn earlier?
W.H. Jr., Pleasant Hills, Pa.
A: Brian T. Jones, a certified financial planner in Fairfax, Va., sees two issues with your situation. The first is the ability of the child or custodian to access money before age 21. UGMA rules state that a custodian's responsibility is to manage the account for the child's benefit. Paying education bills clearly meets that requirement.
The bigger issue, Mr. Jones says, is if you die while serving as custodian. If this happens, the assets would be included in your gross estate for estate-tax purposes. To avoid that scenario, designate a successor custodian should you die before the minor reaches age 21, he says. Most financial institutions have a form for designating a successor custodian.
Or you could appoint someone as custodian now. By doing this, the UGMA account becomes complete and is subject to gift-tax rules. The move would remove the UGMAs from your estate and you would relinquish all control over them.