You can make contributions to someone else's individual retirement account, or IRA, if that person earned income during that tax year. The amount you give cannot exceed that person's earned income in that year. For example, if his earnings were $3,000, you can contribute only up to $3,000 that year.
Friends and relatives commonly contribute or even start IRAs for children, students, young adults or adults who have not saved enough for retirement, according to the Teachers Insurance and Annuity Association. If you make your contribution early, when the recipient is younger rather than older, the interest on the amount can really add up, or compound over time. You can also contribute to your spouse's IRA if you have made the maximum contribution to your own.
You can choose to open a traditional or Roth IRA for someone else. Depending on the financial institution, the initial contribution required will vary. Taxes for a traditional IRA are deferred until the money is withdrawn. Contributions for a Roth IRA are made after taxes, so when money is later withdrawn, no taxes will be due. However, the account holder is subject to a penalty on any early withdrawals.
The account holder of a traditional IRA must pay a 10 percent penalty on any withdrawals made before the age of 59 1/2. However, if withdrawals are made for qualified educational costs or for the purchase of a first home, there will be no penalties. While you can just give someone money outright, there are other benefits associated with contributing money in the form of an IRA.
You can help someone learn about the benefits of saving and investing by starting an IRA for him or contributing to it. He can also choose to manage the money himself, by deciding how and where it is invested. These are valuable lessons for anyone to learn, especially for a young person. Also, if you are at least 70½ years old, you can contribute directly to another party like a qualified charitable organization from your own traditional or Roth IRA, as of the tax year 2011. Charitable organizations include public charities or private operating foundations.