Can I set up a tax-free fund for my friend, who will one day wind up in rehab?

[toadspittle]

Bear with me on this one.

I have a friend who lives on the other coast. His life is very gradually spinning out of control. I, unfortunately, feel confident that, in about 10 years, he will bottom out, be broke, and possibly heavily alcoholic or addicted to other drugs. Then he will have to move back here, where his family and friends live. His family has been unhappy with his lifestyle choices, and have already given him gobs of cash over the years. I suspect he’ll come to me for aid in his time of dire need.

So I’m thinking of starting a fund for him (like a college tuition fund or an IRA) now, so that in 10 years I won’t be caught off-guard when I need to send him to rehab and help him back on his feet.

Is there any way to do this tax-free (instead of opening a mutual fund acct., etc.)? Neither of us are anywhere near retirement age, so an actual IRA would have huge penalties.

[And please stick to the OP, without challenging my basic assumptions about my friend’s destiny or the wisdom of my scheme vs. earlier intervention, letting him bottom out on his own, etc. Thanks.]

[Phlosphr]

Yes you can set up a Roth IRA or some other such money building IRA. You will have to take tax out when you claim it, but if you put 5k in a good IRA you will have a good some. The one I invested in when I was 25 said that if I had 20k in it by thirty years old, then sat on it. It would be worth more than 1.3 mill when I was 65. Nice little nest egg if you ask me. In the eight years since making my initial investment, I’ve put the 20k in it - with my wife - and that is our retirment. It is much better than a 401k and we are pretty proud of thr growth - and piece of mind when we were 25.

Outside of the OP. I think your motives are slightly off. Damn if I had a friend who did what are wanting to do. I’d rely on him to bail me out when I was all hemmed up…
Too bad he’s not mature enough to do it on his own.

[cynic]

*Originally posted by toadspittle *
**Is there any way to do this tax-free (instead of opening a mutual fund acct., etc.)? **

No, but if you’re looking for a very safe investment that would be appropriate for a time horizon of about ten years or so you might considering using I-Bonds. I-Bonds feature tax-deferred growth and are not subjected to state or local taxes. If held for more than five years, you would only have to pay a maximum of 18% on your capital gains.

If you’re willing to take on more risk in hopes of achieving higher returns, you could add a broad-based, low-cost equity index fund, as they are highly tax-efficient.

[Ike_Witt]

Sorry, but a Roth IRA is a bad idea.

Distributions from a Roth IRA are not included in taxable income: however, qualified distributions cannot be made prior to the fifth year of the accounts existance. Qualified distributions include those make after 59 1/2, those made to the estate or beneficiary at the owners death, those made to a disabled owner, or those made to a first time homebuyer.

An annuity is an option to keep explore. A deferred annuity with a flexible premium would allow disbursement to begin down the road and allow you to contribute at different levels as the situation warrents. Talk to an insurance salesman.

[lite]

this is easy. Begin by contacting private rehabs and talk them into a future admission plan. This works basically like an insurance policy. Tell the finance office the situation, agree to a program (open-ended so they have to accept any chemical abuse)
and agree to a stipulation that if he never accepts rehab you can’t get a refund.

To keep your cost lower, agree to a cap of around 70% (balance paid at end of rehab should he enter) and set a date at least 5 years from then.

they have your payments for 5 years locked in to keep nomatter what happens, you still have a decent cash flow. You may need a lawyer though, so that’ll cost some.

I hope your friend finds hope. I’ve been there, and will die happy if I never go back