A Roth IRA is a popular retirement savings account that offers tax-free growth and tax-free withdrawals in retirement. Unlike traditional IRAs (IRA stands for “individual retirement account”), which offer tax breaks upfront, Roth IRAs allow you to contribute after-tax dollars, which means your investments grow tax-free over time. But can you open a Roth IRA for someone else? This is a common question, especially for those looking to help a loved one, like a child or partner, kickstart their retirement savings.
In this article, we’ll explore whether it's possible to open a Roth IRA for someone else, what alternatives exist, and the pros and cons of doing so. We’ll also provide answers to frequently asked questions like, “Can I contribute to someone else’s Roth IRA?” and “Can you gift a Roth IRA before death?”
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What is a Roth IRA?
A Roth IRA is a retirement savings account that offers some unique benefits compared to other accounts. You contribute after-tax income, meaning the money you put into the account has already been taxed.
The primary advantage of a Roth IRA is that your money grows tax-free, and when you retire, you can withdraw it without paying any additional taxes. There’s also no required minimum distribution (RMD) like with traditional IRAs, meaning you can let your money grow for as long as you’d like.
To open a Roth IRA, the account holder needs to meet certain eligibility requirements. First, they must have earned income (from a job or self-employment). There are also income limits for contributing to a Roth IRA. For 2024, single filers with an income under $146,000 can contribute fully, while married couples filing jointly can contribute if their combined income is under $230,000. If your income exceeds those levels, a Roth IRA is not for you.
Age isn’t a barrier to opening a Roth IRA—both children and adults can have one as long as they meet the income requirement.
Can you open a Roth IRA for someone else?
You can’t directly open a Roth IRA for another adult, such as a partner or sibling, because Roth IRAs are individual accounts. They're specifically tied to the account holder’s Social Security number and are meant to be managed by the individual themselves. It's only possible to open a custodial Roth IRA (where an adult manages the account until the minor reaches majority) for someone under 18 (or 21 in some states).
Can you transfer ownership of a Roth IRA to another person?
While you can’t directly open a Roth IRA for another adult, you can name someone as a beneficiary on your account. Upon your death, the funds in your Roth IRA will transfer to your designated beneficiary without triggering immediate tax liabilities, although the beneficiary must follow specific distribution rules.
Naming a beneficiary is not the same as setting up an account for someone else, but it's a way to ensure your Roth IRA benefits someone after your passing. Keep in mind that beneficiaries have to follow rules on withdrawing funds, but unlike with traditional IRAs, they won’t have to pay income tax on qualified distributions.
Can I contribute to a Roth IRA for someone else?
While you can’t open a Roth IRA for someone else directly, you can contribute to their existing Roth IRA as a gift. This option allows you to help someone grow their retirement savings while staying within IRS rules.
When gifting Roth IRA contributions, remember that the recipient must meet certain criteria. “The recipient must have earned income to qualify for contributions,” says Steven Kibbel, a financial planner, entrepreneur, and financial advisor at Prop Firm App. “If contributions exceed the recipient’s earned income or the IRA limits, there’s a 6% tax penalty on the excess until it’s corrected.”
“Gifting contributions to a Roth IRA has no direct tax impact since the account owner is not required to report the contributions as income,” says David L. Blain, a CFA, independent Registered Investment Advisor (RIA), and the Chief Executive Officer at BlueSky Wealth Advisors. Besides that, in 2024, the annual exclusion for gifts is $18,000 per recipient, which is significantly higher than the $7,000 Roth IRA contribution limit for individuals under 50.
Exploring Roth IRA alternatives for minors
Exploring alternatives for minors who want to start saving for retirement can be a smart financial move, even if they aren’t yet eligible to open a standard Roth IRA.
Custodial Roth IRA accounts
It is possible to open a Roth IRA for someone else if that person is a child. “This is typically done through a custodial Roth IRA, where an adult manages the account until the minor reaches the age of majority,” Kibbel says.
Since the account is in the minor’s name, they must have a job or other income source to qualify for the account. “The minor must have earned income, and contributions can’t exceed what they’ve earned in a year,” he says. “This is a crucial factor to keep in mind.”
Opening a custodial Roth IRA for a child or dependent can be a great way to launch their retirement savings. Thanks to the power of compound interest—the interest calculated on both the initial principal and the accumulated interest from previous periods—even small contributions can grow substantially over time.
Trust or custodial account
As an alternative to a Roth IRA, you might consider setting up a trust or custodial account—both different from a custodial Roth IRA. Both custodial accounts and trusts offer different levels of flexibility and control, depending on your goals for the recipient.
“A custodial account, like a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account, offers more flexibility in terms of contributions and how the money can be used,” Kibbel says. “Unlike a Roth IRA, there’s no earned income requirement for the beneficiary.” This makes custodial accounts a popular choice for families looking to set aside funds for a child's future without the restrictions tied to retirement accounts.
Trusts, on the other hand, offer even more control over how and when the money is distributed. They allow you to specify conditions for using the money, which can be beneficial if you’re concerned about the recipient’s financial responsibility. For instance, you can structure a trust to fund education, a first home purchase, or even provide a steady income stream over time.
While trusts don’t offer the same tax benefits as Roth IRAs, they are powerful tools for wealth transfer and long-term financial planning.
Opening a custodial Roth IRA for someone else
Opening a custodial Roth IRA for a minor or a dependent is a relatively straightforward process but involves several key steps. “The account must be set up in the name of the individual who has the earned income, even if someone else is contributing to it,” Kibbel says. “This is non-negotiable.”
To get started, you'll need the following documentation:
- Social Security number of the minor or individual for whom the account is being opened.
- Proof of earned income, such as a W-2 form or pay stub. This is essential because Roth IRA contributions can only be made based on earned income.
- Birth certificate to confirm the minor’s age and establish eligibility for a custodial account.
- Guardian information, since the adult setting up the account will manage it until the minor reaches the age of majority.
You can open the custodial Roth IRA through a financial institution, either online or in person. Many major brokerage firms offer custodial Roth IRAs, making it easy to compare fees and investment options.
Managing contributions
Once the custodial Roth IRA is set up, it’s important to stay compliant with IRS rules. Contributions to the account must not exceed the individual’s earned income for the year, and the maximum contribution limit for Roth IRAs in 2024 is $7,000 (for individuals under 50).
Keep detailed records of all contributions and withdrawals for tax purposes and future financial planning. If others want to contribute to the minor's Roth IRA as a gift, make sure those contributions also follow IRS rules.
Educating minors about finances
While you, as the custodian, manage the account initially, the minor will gain full control of the Roth IRA upon reaching the age of majority.
Make sure the account holder understands how Roth IRAs work, including the benefits of long-term investing and the potential tax advantages. Teach them about compound interest and how early investments can grow over time; contribution limits and why it’s important to stay within them; and withdrawal rules, particularly that Roth IRAs have penalties for early withdrawals unless certain conditions are met.
FAQs
Can you give a Roth IRA as a gift?
You can contribute to someone else’s existing Roth IRA as a gift. However, the recipient must have earned income in the same year, and the contributions cannot exceed their annual earnings or the IRS limit (currently $7,000 for those under 50 in 2024). “The tax implications are generally favorable, and most people don’t need to worry about triggering a gift tax because the annual exclusion for gifts is higher than the IRA contribution limits,” Kibbel says.
Can I open a Roth IRA for my partner?
No, you cannot directly open a Roth IRA for your partner, because Roth IRAs must be set up in the name of the person who has earned income. However, you can help fund their Roth IRA by gifting contributions, provided they meet the eligibility criteria (earned income and contribution limits). It's always smart to consult with a tax advisor to ensure proper compliance with IRS rules.
What is the disadvantage of a Roth IRA for kids?
While a Roth IRA can be a great long-term savings tool for children, one disadvantage is that the minor gains full control of the account when they reach the age of majority (typically 18 or 21, depending on the state). This could mean they end up using the money for purposes other than retirement savings. Additionally, a Roth IRA may be considered the child's asset, which could impact financial aid for college.
Is it possible to open a Roth IRA for a child with no income?
A Roth IRA cannot be opened for a child with no earned income. Contributions to a Roth IRA are only allowed if the account holder has earned income, such as wages from a part-time job. If your child does not have earned income, other options, such as a custodial savings account or a trust, may be more appropriate for building their financial future.
Can I open a Roth IRA for my adult child?
You can’t directly open a Roth IRA for your adult child, but you can help fund their Roth IRA as long as they have earned income and stay within IRS contribution limits. Just remember, any contributions must not exceed the adult child's annual earned income.