Every parent wants their child to be financially secure, even after the child has grown up and left home. Especially in their early working years, your children may benefit from putting money in a Roth IRA because they are in a low tax bracket but might not have the extra funds. In fact, CNN pointed out that 76 million Americans are actually struggling to get by and are living paycheck to paycheck. However, you might be able to help your adult children out, as long as they have earned some type of income during the year.
Gifts Aren't Compensation
To be eligible to contribute to a Roth IRA, your adult child has to have compensation for the year. Compensation doesn't include gifts from you – only things like wages, salaries, self-employment income and alimony. If your adult child is married and files a joint return, he can also rely on compensation earned by his spouse. However, if he and his spouse file separate returns, this exception doesn't apply.
No Money Tracking
As long as your adult child has enough compensation, the IRS doesn't care whether she uses your gifted dollars or her compensation to contribute to her Roth IRA for the year. Suppose she has a part-time job that pays her $15,000 for the year and she spends all $15,000 on her basic needs. If you give her $5,000 more, she can put that money in her Roth IRA even though that $5,000 wasn't compensation.
The maximum Roth IRA contribution equals the smaller of the annual limit or the adult child's compensation. For 2018, your adult child can't contribute more than $5,500 for the year. In 2018, the limit goes up to $6,500 if the individual is over the age of 50. Suppose your child has $5,500 in compensation. Even if you give him $6,000, he can't put more than $5,500 in his Roth IRA for the year.
Gift Tax Consequences
Money that you give your adult child for her Roth IRA counts as a gift. The annual exclusion allows you to give your child $14,000 in 2017 and $15,000 in 2018 without incurring any gift tax. Since the annual contribution limit for Roth IRAs is significantly lower than the gift tax annual exclusion, you won't owe any gift tax if that's the only gift you make to your adult child for the year. But, if you're giving her other gifts as well, the gift for the Roth IRA contribution might add to your gift tax bill.
- Internal Revenue Service: Publication 590 -- Individual Retirement Arrangements (IRAs)
- Internal Revenue Service: IRS Announces 2017 Pension Plan Limitations; 401(k) Contribution Limit Remains Unchanged at $18,000 for 2017
- Kiplinger: Roth IRAs for Kids
- Internal Revenue Service: In 2017, Some Tax Benefits Increase Slightly Due to Inflation Adjustments, Others Are Unchanged
- Rodgers & Associates: 5 Strategies for Gifting to Adult Children
- The Finance Buff: Gift To Adult Children’s Roth IRA
- RothIRA.com: 2018 Roth IRA Limits Announced
- IRS: Frequently Asked Questions on Gift Taxes
- CNN: 76 Million Americans Are Struggling Financially or Just Getting By
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