How To Give the Gift of a Roth IRA

Roth individual retirement accounts (IRAs) are qualified retirement accounts that allow you to save and invest for retirement tax-free by making contributions using after-tax dollars. Once you’ve contributed money to the account, you won’t be taxed on its growth or on distributions made after you turn 59 ½.

If someone close to you isn’t yet able to save for their own retirement, you might be wondering whether you can help them out with the gift of a Roth IRA. Let’s go over how Roth IRA gifts work and what you need to consider before gifting retirement account contributions.

Can You Gift a Roth IRA?

You can’t directly give a Roth IRA account to someone else, but you do have a few similar options:

• You can withdraw money from your own Roth IRA to give to someone else.
• You can leave a Roth IRA to a beneficiary when you die.
• You can contribute to someone else’s Roth IRA.

However, each of these options has caveats and potential consequences to consider.

Withdrawing Funds From Your Roth IRA

If you’re over age 59 ½, you can withdraw funds at will from your account without penalty. Those funds can be given to anyone, subject to specific IRS rules about how much money can be gifted to someone else each year. 

If you’re 59 or younger, you can still withdraw your cost basis (the money you contributed to the account) without penalty. If you withdraw any earnings, you’ll likely pay a 10% penalty.

Leaving a Roth IRA to a Beneficiary

Upon the original owner’s death, a Roth IRA belongs to the designated beneficiary. If the beneficiary is the spouse of the original owner, they take over ownership of the account. They can also choose to roll it over into one of their own qualified retirement accounts.

If the beneficiary is not the original owner’s spouse, they can’t take over ownership of the account. Instead, the account becomes an inherited IRA, which must be distributed within 10 years.

Gifting Roth Contributions

The final option is to give money to the individual, who can then contribute it to their IRA. While it might seem simple, gifting IRA contributions involves a few important considerations.

How To Give Roth IRA Contributions as a Gift

The first step is determining whether the recipient is qualified to contribute to a Roth IRA based on their adjusted gross income (AGI) and tax filing status. Here are the income limits for 2022:

If the recipient is married and files separately, their contribution amounts depend on their income and whether they lived with their spouse for any portion of the year.

In addition, the recipient can’t contribute more to their Roth IRA than they earned in a year.  That means they will need to have earned at least the amount of the contribution in the year of the gift. Earned income can be any income that is reported to the IRS, such as wages, salaries, tips, and self-employment income.

Custodial Roth IRA

Individuals under the age of 18 can’t open an IRA without an adult acting as a custodian. If the recipient of your gift is under 18 (or 21 in some states), they’ll need to open a custodial Roth IRA. Once they reach the age of majority in their state, the recipient can convert their custodial Roth IRA into a regular Roth IRA and control it themselves.

How Gift Taxes Impact Roth IRA Contributions

The IRS allows you to give an individual a certain amount of annual gifts with no tax liability. For 2022, the gift tax exclusion amount is $16,000. Any amount over $16,000 gifted to one individual is subject to the gift tax, which is generally paid by the giver. The gift tax doesn’t apply to gifts you give your spouse.

Because the amount of the gift tax exclusion is more than the annual Roth IRA contribution limit ($6,000), neither the giver nor the recipient would generally be responsible for paying taxes on gifted Roth IRA contributions. However, if the giver has also given the recipient other gifts during the year, they’ll need to confirm whether those amounts add up to more than the excluded amount.

In that case, the giver would file an IRS form 709 and possibly pay gift tax. The good news is, in addition to the annual exclusion, there’s a lifetime exemption amount for combined gift and estate taxes. You don’t need to pay gift taxes until you’ve exceeded that amount, which in 2022 is $12,060,000.

Special IRA Rules for Spouses

Spousal IRAs exist to allow one spouse to contribute for both members of the couple even if only one has earned income. Remember, you can only contribute the amount of earned income you’ve had for the year to a Roth IRA.

Generally, spouses can contribute up to the maximum annual contribution for each person based on their age:

• Under 50 years old: $6,000 
• Age 50 or older: $7,000

For example, if you’re both in your mid-40s, you could contribute up to $12,000. If one of you is over age 50, you could contribute up to $13,000.

Frequently Asked Questions (FAQs)

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