17 Jan Should I put money in a Roth or gift it outright to my kids?

Q. I’m 69 years old, retired and have been making a few dollars by investing in CDs that I intend to gift to my children down the road. Would it be more advantageous to open a Roth IRA with the earned dividends on those accounts? The requirements for Roth are a little fuzzy.
— Planning

A. It’s great that you’re in a position where you want to gift a portion of your dividends to your children.

The Roth proposition is one worth considering.

Roth IRAs are a powerful retirement tool for people, said Matt Rembish, a certified financial planner with OneDigital in Boonton.

As you noted, there are a few requirements to contribute to a Roth IRA.

“You need to have earned income – wages, salary, tips, professional fees, bonuses, etc.,” Rembish said.

Your earnings from the CDs are not considered earned income.

“Your income also needs to be under a certain dollar amount to contribute which is based on how you file your tax return,” he said.

Roth IRA contributions have a “phaseout,” which means once your income reaches a certain threshold, you can contribute a reduced amount until your income reaches a certain point where you won’t be able to contribute at all, he said.

For single filers in 2025, your Modified Adjusted Gross Income (MAGI) must be under $165,000 to contribute, with the phaseout beginning at $150,000. Married Filing Jointly tax filers’ MAGI must be under $246,000, with the phaseout beginning at $236,000. In 2025, the maximum amount individuals under age 50 can contribute is $7,000, and it’s $8,000 for individuals over age 50, Rembish said.

“You do not get a tax deduction on Roth IRA contributions on your tax return. So, you are funding it with after tax contributions,” he said. “What you put in plus any growth will be able to be taken out tax-free in retirement. This is an incredible benefit, especially for people that have many years until retirement.”

You cannot open the Roth IRA account for your children, Rembish said. They would need to do it themselves, unless they are minors. But you can fund the Roth IRA if they have earned income below the thresholds.

Your other option could be to open a separate brokerage account under your name, and invest any dividends in the stock market, Rembish said. The bonus of this strategy is that if you were to leave the assets in this account to your children after you pass away, your children would receive a “step-up” in basis, he said.

“If I bought a stock for $100, my cost basis is $100. If I hold this stock, and it grows to $500, and I pass away, my heir that inherits the stock would have a new cost basis of $500,” Rembish said. “The `step-up’ eliminates the gain that I had, so my heir could sell the stock immediately and not owe anything in taxes.”

So, Rembish said, there isn’t one right answer here.

“If you chose a Roth, I love the tax advantages, and it would help them save for retirement. There are penalties if they try to access this money before age 59 ½,” he said. “If you chose to leave this money in a brokerage account and naming them as the beneficiaries, after you die they would get access to the money immediately and a `step-up’ in basis.”

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This story was originally published in December 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.