Turn Your Kid Into a Tycoon
By Len Costa (found online)

For years America's wealthiest families have used complex trusts to protect their assets and ensure their offspring grow even wealthier. But when you cut away the legalese, the logic is simple: The longer money is shielded from taxation, the more its value compounds over time and the richer the next generation becomes. Thankfully, you don't need a white-shoe law firm and a seven-figure trust account to create a financial windfall for your kids. "Anybody can make his family rich just using the tax code," says New York CPA Ed Slott, founder of E. Slott & Company. Your high-powered dynasty builder is a mass-market retirement account known as the Roth IRA. By  opening one for your kids or designating them as the beneficiaries of your own Roth IRA, you can leverage small sums of money into millions of dollars—all tax-free.

Introduced in 1998, the Roth IRA enables account holders to build wealth on a tax-advantaged basis, just like a traditional IRA does. (SEE WIKI ON THIS.)  But when it comes to exactly when taxes are paid, these IRAs couldn't be more different. With the traditional IRA, you save on taxes now but pay the piper when you start to withdraw after age 701/2. Not so with a Roth IRA. Although you can't deduct your contributions up front, you won't pay any taxes when the substantially larger sum of money eventually comes out, and neither will your heirs.

The key is starting early. You can open a Roth IRA for your kid as soon as
he has earned income from a summer or after-school job. This year, you can
contribute an amount equal to your child's total "taxable compensation," up
to the annual IRA contribution limit of $4,000 (next year, the limit rises
to $5,000). The magic of compounding means a little goes a long way: If you
set up a Roth IRA for a 15-year-old and make contributions of $4,000 a year
for the next 10 years, earning a compound average annual return of 8
percent, your generosity would be worth $1,359,563—completely tax-free—when
your kid turned 65.

Your kids aren't working yet? That's okay. If you are married and report
income on your tax return of less than $150,000 ($95,000 if you are
single), you can take full advantage of a Roth IRA for yourself and seed
your dynasty through a second channel. That's because the IRS enables your
kids to stretch required withdrawals from an inherited IRA over their own
life expectancies, enabling the assets to grow tax-free for much longer. In
other words, whatever you don't spend on yourself becomes essentially a
trust fund for your kids after you die.

"It's compound interest on steroids," says Slott. One caveat: For the
strategy to work, the financial services firm that holds your account must
allow this "stretch IRA" strategy and you must ensure that your beneficiary
designations are up to date.

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