It is possible to gift money into an Individual Retirement Arrangement (IRA) for a child, as long as the account meets all of the requirements. It is likely that there will be tax implications for both the child and the parent. These will vary by each individual situation. It is important for anyone considering gifting money to discuss his specific needs and concerns with a tax professional before proceeding. Some IRAs have limits on the total amount of contributions each year which must be considered when gifting money into the account.
A person can have an IRA only if she meets all of the account holder requirements. She must have earned a taxable income in order to open an IRA. In certain situations there are limits to the adjusted gross income that dictate the type of IRA that a person can open and the total annual contributions that can be made to the account. As long as the money gifted into an account does not put the child over the annual limit, there is no reason a parent cannot add money to a child's IRA account.
Contributions into an IRA for a child can be made only if the child has made a taxable income during that year. If he has an account but does not have any wages in a given year, no money can be added to the IRA for the year. Money can be added to a qualifying account at any time throughout the year. Money can also be added to an IRA any time prior to the income-tax filing date in the next calendar year.
If IRA contributions exceed the allowable amount for the year, there will be a tax penalty assessed on the account. Money that is withdrawn from an IRA prior to the account holder turning 59 ½ can incur substantial penalties as well as taxes. In most cases the amount of the penalties is large enough to discourage people from removing the money except under the direst of circumstances.
When contributions are made to a traditional IRA, the contributions are usually tax-deductible. The owner must pay income tax at the time the money is withdrawn from the account. A Roth IRA operates differently. Contributions made into a Roth account are not tax-deductible, but no taxes are due when the money is withdrawn. Roth contributions are not reported on income-tax returns, but traditional IRA contributions are.
- Carol Cowling; Certified Public Accountant; Waterville, WA
- Dave Ramsey; Roth IRA 101; Dave Ramsey; August 2009
- IRS: Tax Topics: Individual Retirement Arrangements (IRAs)
- Jupiterimages/Photos.com/Getty Images