The sooner you make contributions to an individual retirement arrangement, the longer the money can take advantage of tax-deferred growth within the account before you take it out at retirement. If you have extra money and want to contribute to another person's IRA, it is possible, but you need to know the potential pitfalls to watch out for; otherwise, you could owe gift taxes and the recipient could owe excess contributions penalties.
Generally, you cannot make a contribution directly to another person's IRA. Each IRA is linked to one person's Social Security number and that person is the only one who can make a contribution to that account. For example, a married couple cannot share a single IRA account to which both make contributions. Instead, each spouse keeps a separate account.
When you are married and file a joint return with a spouse, you can use your earned income to qualify your spouse to contribute to an IRA if your spouse does not have any earned income. If your spouse does not have a paying job, she generally cannot contribute to an IRA. However, if you have earned income in excess of the amount you contribute to your IRA, you can use your excess earned income so that your spouse can contribute. For example, if you earn $120,000 each year and your spouse is a stay-at-home parent, you can use your earned income so that both you and your spouse can contribute to your own IRAs.
Gift to Another Person
If you want, you can give a gift to someone for him to then contribute to his IRA. However, that person must still meet all of the requirements to be able to contribute to an IRA. For example, if you wanted to give your teenage son money to put in an IRA, your son would have to have enough earned income to contribute. If your son only had $1,000 of earned income, no matter how much money you gifted to him, he could only contribute $1,000 to his IRA. If the recipient contributes more than permitted, the IRS imposes a 6 percent excess contributions penalty on that person each year until the excess is corrected.
Gift Tax Considerations
If you make a gift to another person to contribute to an IRA, that money counts toward your maximum annual gift to that person before you have to pay the gift tax. As of 2012, you can give up to $13,000 per recipient, per year, without incurring any gift taxes. Since the IRA contribution limit as of 2012 is only $5,000 ($6,000 if the IRA holder is age 50 or older), a gift equal to the maximum IRA contribution would not result in any gift tax. However, if you made other gifts to that person as well, you could find yourself owing gift taxes. For example, if you gave your nephew $5,000 to contribute to his IRA and $15,000 to help him buy a house, your gifts would total $20,000, of which $7,000 would be subject to the gift tax. This does not apply to contributions made to a spouse's IRA.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."