So, what if someone is willing to help you build your Roth IRA? Can they contribute money to your account? The short answer is yes. But there are some rules you’ll have to keep in mind. Here’s what you should know.
How To Contribute to Someone Else’s Roth IRA
If someone wants to contribute money to your Roth IRA, there are two ways they can do so. They can simply give the money to you so you can add it to the account, or you can give them the details needed to add money directly into the account. Each financial institution has its own instructions on how to fund a Roth IRA. For example, if your Roth IRA is at Schwab, you can fund the account with a wire transfer, a check deposit, or an electronic funds transfer (EFT).
Recipients Must Qualify for Roth IRA Contributions
While it is possible to gift Roth IRA contributions, not every recipient will be eligible. They’ll need to qualify for Roth IRA contributions. That means you must earn some taxable compensation but can’t earn more than the maximum limit for Roth IRA contributions. Taxable compensation refers to income such as wages, salaries, bonuses, tips, self-employment income, and professional fees. Income not counted by the IRS includes profit from owning a property such as rental income, as well as income from interest, dividends, annuities or pensions. Another person won’t be able to contribute more to your Roth IRA than you make in taxable compensation during the year. For example, if you make $5,000 in 2022, another person would only be able to contribute up to $5,000 to your Roth IRA, even though the maximum contribution limit set by the IRS is $6,000. You also can’t make too much income. You will only be eligible to contribute to a Roth IRA, or have someone contribute on your behalf, if you make under a certain amount. The limits vary depending on a taxpayer’s filing status as follows:
Contributing to Your Spouse’s Roth IRA Account
If you’re married and filing taxes jointly but your spouse is not earning any income, you may be able to contribute to their individual Roth account using a spousal Roth IRA. Typically, a person needs to have earned income to be eligible for a Roth account in most cases, including those for minors. For a spousal Roth IRA, your spouse doesn’t need to have earned income as long as you do.
Gift Taxes Could Apply
If someone contributes to your Roth IRA, it will count as a gift for tax purposes. The giver doesn’t have to pay gift taxes as long as they haven’t gifted you more than the exclusion amount for the year ($16,000 per person in 2022). So if someone contributes the maximum of $6,000 to your Roth IRA, there won’t be any taxes. However, if they gift other amounts to you in the same year that exceed the $16,000 limit, they would pay taxes on the amount over the excluded amount.
What To Know About Contributing to Someone Else’s Roth IRA
If someone is willing to contribute to your Roth IRA account, it’s fairly easy for them to do so. However, make sure you qualify for those contributions first to avoid penalties and other issues. Asking friends or family members for Roth IRA contributions can be a smart move, especially in your younger years when it’s difficult to save for retirement yourself. A gift of Roth IRA is a gift that keeps on giving, which can set you up for a more comfortable financial future. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
