From the transcript:
Diane Streleckis: And what about gifting with a Roth, does that make sense?
Maria Bruno: If you make the decision to do annual gifting, if the donee actually has earned income, you can make the contribution for the donee. So, for instance, if you want to give annual contributions to your children, as long as they have earned income, you can make the contribution to his or her Roth IRA. And the cap is $5,500 for 2016, assuming the donee’s under age 50. But that’s one way to gift assets while using the annual gift-tax exclusion.
Is that right? Can you gift to someone else’s Roth IRA? $5,500 per adult child under 50, as long as they have earned income? Grandkids, brothers and sisters, nieces and nephews too?
We should see what the IRS says. IRS Publication 590A Contributions to Individual Retirement Arrangements (IRAs) is on point here. Under “Can You Contribute to a Roth IRA?” it says:
Generally, you can contribute to a Roth IRA if you have taxable compensation (defined later) and your modified AGI (defined later) is less than:
- $193,000 for married filing jointly or qualifying widow(er),
- $131,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and
- $10,000 for married filing separately and you lived with your spouse at any time during the year.
Note: Those are income limits for 2015. The limits are slightly higher for 2016 and 2017.
Under “How Much Can Be Contributed?” it says:
The contribution limit for Roth IRAs generally depends on whether contributions are made only to Roth IRAs or to both traditional IRAs and Roth IRAs.
Roth IRAs only. If contributions are made only to Roth IRAs, your contribution limit generally is the lesser of:
- $5,500 ($6,500 if you are age 50 or older), or
- Your taxable compensation.
However, if your modified AGI is above a certain amount, your contribution limit may be reduced, as explained later under Contribution limit reduced.
Roth IRAs and traditional IRAs. If contributions are made to both Roth IRAs and traditional IRAs established for your benefit, your contribution limit for Roth IRAs generally is the same as your limit would be if contributions were made only to Roth IRAs, but then reduced by all contributions for the year to all IRAs other than Roth IRAs. Employer contributions under a SEP or SIMPLE IRA plan do not affect this limit.
The income limit and the contribution limit are both on the IRA owner. There is no separate provision for contributing on someone else’s behalf (other than the spouse).
So the answer in the Vanguard podcast missed two big caveats. For “gifting with a Roth” to work, the recipient must have enough compensation, be under the income limit, and not have already used up the IRA contribution limit him- or herself. If you intend to contribute to someone else’s Roth IRA for wealth transfer across generations, it only works if they are eligible but they won’t contribute or they won’t contribute the maximum otherwise on their own. You can’t do it if they are not eligible to contribute in the first place. If they already contributed the maximum themselves, you can’t do it again.