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Should You Leave Your IRA to a Child?

What you should know about naming a minor as an IRA beneficiary.

Can a child inherit an IRA? The answer is yes, though they cannot legally own the IRA and its invested assets. Until the child turns 18 (or 21, in some states), the inherited IRA is a custodial account, managed by an adult on behalf of the minor beneficiary.1,2

IRA owners who name minors as beneficiaries may have good intentions. Their goal may be to “stretch” a large Roth or traditional IRA. Distributions from the inherited IRA can be scheduled over the (long) expected lifetime of the young beneficiary.

Those good intentions may be disregarded, however. When minor IRA beneficiaries become legal adults, they have the right to do whatever they want with those IRA assets. If they want to drain the whole IRA to buy a Porsche or fund an ill-conceived start-up, they can.2

How can you have a say in what happens to the IRA assets? You could create a trust to serve as the IRA beneficiary, as an intermediate step before your heir takes possession of those assets as a young adult.

In other words, you name a trust as the beneficiary of your IRA, and your child or grandchild as a beneficiary of the trust. When you have that trust in place, you have more control over what happens with the inherited IRA assets.2

The trust can dictate the how, what, and when of the income distribution. Perhaps you specify that your heir gets $10,000 annually from the trust beginning at age 30. Or, maybe you include language that mandates that your heir take distributions over their life expectancy. You can even stipulate what the money should be spent on and how it should be spent.2

A trust is not for everyone. The IRA needs to be large to warrant creating one, as the process of trust creation can cost several thousand dollars. No current-year tax break comes your way from implementing a trust, either.2

In lieu of setting up a trust, you could simply name an IRA custodian. In this case, the term “custodian” refers not to a giant investment company, but a person you know and have faith in who you authorize to make investing and distribution decisions for the IRA. One such person could be named as the custodian; another, as a successor custodian.2

What if you designate a minor as the beneficiary of your IRA, but fail to put a custodian in place? If there is no named custodian, or if your named custodian is unable to serve in that role, then a trip to court is in order. A parent of the child, or another party who wants guardianship over the IRA assets, will have to go to court and ask to be appointed as the IRA custodian.2

You should also recognize that the Tax Cuts & Jobs Act reshaped the “kiddie tax.” This is the federal tax on a minor’s net unearned income. Required minimum distributions (RMDs) from inherited IRAs may be subject to this tax. A minor’s net unearned income is now taxed at the same rate as trust income rather than at the parents’ marginal tax rate.3,4

This is a big change. Income tax brackets for a trust or a child under age 19 are now set much lower than the brackets for single or joint filers or heads of household. A 10% rate applies for the first $2,550 of taxable income, but a 24% rate plus $255 of tax applies at $2,551; a 35% rate plus $1,839 of tax, at $9,151; a 37% rate plus $3,011.50 of tax, at $12,501 and up.3,5

While this may be a negative for middle-class families seeking to leave an IRA to a child, it may be a positive for wealthy families: the new kiddie tax rules may reduce the child’s tax liability when compared with the old rules.4

One last note: if you want to leave your IRA to a minor, check to see if the brokerage holding your IRA allows a child or a grandchild as an IRA beneficiary. Some brokerages do, while others do not.1   Due to the complex nature of a trust creation, you should seek the counsel of a legal professional.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.1 – investopedia.com/articles/retirement/09/minor-as-ira-beneficiary.asp [6/19/18]
2 – kiplinger.com/article/retirement/T021-C000-S004-pass-an-ira-to-young-grandkids-with-care.html [5/17]
3 – forbes.com/sites/ashleaebeling/2018/05/08/the-kiddie-tax-grows-up/ [5/8/18]
4 – tinyurl.com/y7bonwzx [5/31/18]
5 – forbes.com/sites/kellyphillipserb/2018/03/07/new-irs-announces-2018-tax-rates-standard-deductions-exemption-amounts-and-more/ [3/7/18]

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What Determines Car Insurance Rates?

Driver history is just one factor; there are many others.

Your auto insurance payment is not just based on your driving history. Assorted variables come into play that have nothing to do with your accident record or your experience behind the wheel.

Where you live counts. If you reside in a congested big-city neighborhood with an unyielding traffic stream, that could push your premium higher. Certainly, the accident threat is greater there than in a rural area. In addition, high-density neighborhoods may see more vandalism, break-ins, and auto theft than lower-density communities – plus, more car insurance fraud schemes.1

The vehicle you drive factors into the calculation. Yes, a luxury car will commonly cost more to insure than an economy car, but vehicle price is not the only factor. Certain makes and models are stolen more than others: the Honda Civic, the Nissan Altima, and the Toyota Camry are prime targets for auto thieves. If you drive a 4×4 SUV, the insurer may factor in some off-road use, even if you just want to drive it to work, the beach, and the mall. Engine horsepower could also affect your rates.2

If you own a home, your auto insurance premium might be less than that of a renter. Renters are perceived to have more trouble with their household finances than homeowners. Whether this is true or not, the status of being a homeowner is a positive element in auto insurance rate calculation.2

Are you married? That is a plus when it comes to auto insurance rates, because some insurers think married people lead less risky lives than single people. This belief was reinforced back in 2004, when the National Institutes of Health released a study that concluded that single people were twice as likely as married people to get into car accidents. Like it or not, this presumption affects rates.1,2

If you are an older male, your rates might be the lowest. A Consumer Federation of America white paper looked at the rates set by some companies and found that older men (at least in ten cities) paid less than older women. On the other hand, younger men are thought to be the most reckless drivers (and drivers from that demographic are most often the drivers in fatal wrecks).1

Bad credit can mean higher premiums. It can elevate premiums even more than an accident in some states. In three states, this does not apply: California, Hawaii, and Massachusetts. All three bar insurance carriers from hiking auto insurance rates due to personal credit histories.1

Your job (and how you commute to work) may matter. In its 2018 State of Auto Insurance Report, car insurance comparison website The Zebra says that the typical, full-time worker will save about $30 in car insurance costs compared to a part-time worker. Active duty military and veterans tend to pay around $50 less than civilians. If you work from home, that is a positive factor. If you drive a long way to and from work, that is a negative factor. If you commute during peak hours or between 12:00-2:00am, that is another negative factor.2

Insurers run these variables through their own refined algorithms. This is another reason car insurance rates vary so much from carrier to carrier. Compare and contrast and shop around, for one company may give more weight to some factors than others – and the savings found through thorough shopping could be significant.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – nerdwallet.com/article/5-surprising-factors-inflate-car-insurance-rate [1/8/18]
2 – wisebread.com/7-things-that-affect-your-car-insurance-rates [5/10/18]

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Why community college may be a student’s first and best path to her/his career

As my own family goes through our second and final iteration of the college search, majors, careers, and the rest, I continue to come across some very interesting information advocating the merits of community college.

My family lives in a hyper-competitive high school district, one of the best in the state of California. And yet, according to the high schools own placement records, almost 50% of these students will start post high school education in community college.

Most high school seniors don’t want to entertain this path. But numbers don’t lie.

I thought you might enjoy two resources I have come across that make the point that community college could be . The first is a link to a video titled Success in the New Economy. This is an interesting 9 minute video on the merits of community college. And why community college may be the best option for students seeking meaningful, higher-earning careers.

The second is the article below by Associated Press. I hope this perspective opens a few ideas for someone you know.

Big changes coming to key community colleges

By Dan Walters, Associated Press

California’s 114 community colleges are the Rodney Dangerfields of higher education, overshadowed by the state’s four-year universities and not getting much respect.

That’s true even though the community colleges’ 2.1 million full- and part-time students are more than three times the combined enrollments of the University of California and the California State University systems.

More importantly, low-cost, conveniently located community colleges are the primary gateway into post-high school job training and four-year degrees for those who would otherwise be stuck on the lower rungs of the socioeconomic ladder. Some big changes are coming to the system; some of them from Gov. Jerry Brown, who began his political career a half-century ago as a community college trustee in Los Angeles and will end it this year.

Under his prodding, the Legislature has approved a new state-operated online community college that he says will give workers displaced by technology or other circumstances new opportunities to acquire marketable skills.

“I want people to be able to open their own imaginations whether they are 15 or 50. Now (students) have a real opportunity to not only learn but to get a certificate and get skills to earn more money, advance and pursue their dreams,” Brown told the state community college board after signing legislation for the online college.

Brown and the Legislature are also overhauling how the colleges are financed, giving them more state aid but conditioning some money on how well colleges are preparing students for jobs or transfer to four-year institutions.

It’s meant to be a carrot to encourage better performances by local colleges, who previously had been given allocations based on enrollment, but it’s also something of an anomaly.

The governor has stoutly resisted performance measures for K-12 schools, even for his program of directing more state aid to help poor and “English-learner” students raise their academic skills.

He calls that reluctance “subsidiarity,” meaning trusting local education officials to do the right thing, and has rejected pleas of education reformers for more accountability.

It’s a little odd that he would reject such accountability for K-12 schools but insist on it for community colleges.

Still another Brown-backed change is called “California College Promise.” Participating community colleges may provide financial incentives and guaranteed transfers to four-year colleges for community college students meeting certain criteria. The program also envisions community colleges partnering with K-12 schools to improve college preparation.

Brown, however, is not the only source of change for the community colleges.

This month, the state community college board approved an agreement that allows students who have completed required lower-division work in some majors to transfer as juniors to private, nonprofit colleges and universities. While students have sought such transfers in the past, the new agreement provides a more direct pathway for admission.

But perhaps the biggest change coming, albeit slowly, to the state’s community colleges is allowing some of them to offer four-year “baccalaureate” degrees in some fields.

Nine community colleges awarded 135 such degrees this year under a pilot program, involving such fields as dental hygiene, mortuary science and ranch management.

The state Senate has passed a bill to extend the pilot program, but it faces stiff opposition from faculty unions and the Assembly has killed extension legislation in the past.

California has a looming shortage of college-educated workers and if the gap is to be closed, community colleges must be full partners and not merely academic stepchildren.