16 Dec Can I give my kids Roth IRAs for Christmas?

Q. I would like to give my four kids money for Christmas and I would like it to go into Roth IRAs for their future. How can I make sure they do this? I know their Social Security numbers so I could just open accounts for them, but I’m not sure if they have other IRAs too.
— Dad

A. That’s a kind gift.

It will keep on giving for a long, long time.

Anyone can contribute directly to a Roth IRA on behalf of a child – whether it is a parent, grandparent, or other family member, so you can open the accounts yourself if you have the required information, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

“The IRS does not care where the money comes from as long as the tax rules are followed,” he said. “And tax-free growth of investments in a Roth IRA will truly be the gift that keeps on giving over your children’s lifetimes.”

However, there are some considerations to be aware of, many of which will depend on whether you have adult children or minor children, he said.

If your children are already working adults, then you need to be aware of Roth IRA income and contribution limits, DeFelice said.

For 2024, the max an individual can contribute to a Roth IRA is $7,000 (or $8,000 if you are 50 or older). The 2024 Roth IRA income limits are $161,000 for single tax filers and $240,000 for those married filing jointly.

“So if your adult children already contribute to a Roth IRA for themselves, the max that can go in for a given tax year is $7,000 – regardless of whether they contributed the money or you did for them,” DeFelice said. “They cannot put in $7,000 themselves and also receive $7,000 from a parent in the same tax year.”

And if they earn more than the income limits above, no one can make a Roth contribution on their behalf, he said.

However, if you have minor children who are working but do not have an existing Roth IRA and they earn under the income limits, you can certainly help them get started.

In fact, many parents choose to match their child’s earnings and make the Roth contribution themselves, DeFelice said, offering this example:

If your child earns $3,000 at a summer job, you can let them spend their money as they wish and make the $3,000 Roth IRA contribution with your own money.

Some families want their children to have some skin in the game, and choose to implement a matching system as a motivation to start saving. So if a child is willing to sock away $3,500, the parents match it and put in another $3,500 to max out the contribution.

DeFelice said there is no age minimum to make a Roth contribution, but the child must have earned income. And while the max contribution limit is $7,000, you cannot contribute more than what they make in a given year, he said.

“Earned income is defined by the IRS as taxable income and wages — money earned from a W-2 job or from self-employment gigs such as babysitting, mowing lawns, or dog walking,” he said. “Gifts and allowances do not count as earned income.”

DeFelice said you can prove your child’s earned income for a Roth IRA with a W2 or a Form 1099. However, certain independent work like babysitting or mowing lawns usually doesn’t produce these forms, so it’s important to keep a record of the type of work your child has done, when it took place, who it was for, and how much they were paid, he said.

Additionally, if you have a minor child, you can open a custodial Roth IRA, which is an account that a parent or guardian invests and manages until the child reaches the age of majority (18 or 21, depending on the state), he said.

“Once that occurs, the account and all investment decisions legally must be turned over to the designated beneficiary, though many parents continue to help manage the account until their children have the wherewithal to handle it themselves,” he said.

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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.