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.
- You can’t give someone a Roth IRA account, but you can give them contributions for a Roth IRA.
- The total amount of gifts you give one person can’t exceed $16,000 annually, or you risk having to pay a gift tax.
- You can also name someone as a beneficiary on your Roth IRA, which means they will inherit your IRA when you die.
- Spouses can contribute to IRAs for each other, even if only one of them has earned income.
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.1
You must wait five years after opening your account before withdrawing any earnings.
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.2
Some beneficiaries are exempt from this 10-year rule, including minor children of the original owner, chronically ill or disabled individuals, and people who are less than 10 years younger than the original owner.3
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 2022:4
|Single Filers||Married Filing Jointly|
|Can contribute full amount||Modified AGI of less than $129,000||Modified AGI of less than $204,000|
|Can contribute reduced amount||Modified AGI of greater than or equal to $129,000 but less than $144,000||Modified AGI of greater than or equal to $204,000 but less than $214,000|
|Can’t contribute||Modified AGI of greater than or equal to $144,000||Modified AGI of greater than or equal to $214,000|
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 2022, the Roth IRA contribution limit is $6,000. An additional $1,000 catch-up contribution is allowed if you’re age 50 or older.5
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.6
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.7
The annual exclusion for gift taxes changes from year to year. Stay up to date by checking the IRS website for the most recent number.
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 $12,060,000.8
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:9
- 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.
The total combined contributions must be less than or equal to the taxable income you reported on your joint tax return for the year.
Frequently Asked Questions (FAQs)
Can you gift money from an IRA without paying taxes?
You can gift money from an IRA without paying taxes, as long as you meet a few requirements. First, you’ll need to be over age 59 ½ and taking qualified distributions. Then make sure you gift less than the annual exclusion amount (for 2022, it’s $16,000).
What are the distribution rules for an inherited IRA?
Inherited IRAs must be distributed within 10 years unless the beneficiary is a minor, the spouse of the original owner, a chronically ill or disabled person, or someone who is less than 10 years younger than the original owner.