When Gifting a Roth IRA Is Better Than Gifting Cash

When Gifting a Roth IRA Is Better Than Gifting Cash

December 15, 2022

Why Gifting a Roth IRA Is Better Than Gifting Cash

When Gifting a Roth IRA Is Better Than Gifting Cash

December 15, 2022

The Next Generation Will Love a Roth IRA

It’s the giving season. If you are looking for a gift for a teenager or young adult, few are better than a Roth IRA. If it is thoughtfully invested for retirement over 50+ years, it will almost surely have grown by multiples when they need it. And the tax bill is compelling: $0.

Do I have your interest? Here’s how it works.

Anyone who has earned income (from salary, contract work, odd jobs, etc.) can contribute to an individual retirement account, or IRA. The 2022 max contribution to an IRA for someone under 50 is the lesser of their earned income or $6,000. That cap rises to $6,500 in 2023.

There are two basic kinds of IRAs: a traditional IRA (also known as a rollover) and a Roth IRA. A Roth can be particularly compelling. There is no tax on the earnings inside the Roth and there is no tax when the money comes out. That is different from a traditional IRA, where tax is due on distributions.

To contribute to a Roth IRA, a single filer’s income must be under $129,000 (2022 limit). Of course, most young people will qualify. Their problem: they may not have saved the money they earned, so they can’t afford to contribute.

That’s where parents, grandparents or other relatives come in.

A young person can open a Roth IRA and ask a relative to help them fund their annual contribution. It is considered a gift. But anyone can give up to $16,000 to anyone else annually with no tax or reporting obligations (2022 limit).

The result?

Imagine helping your 18-year-old granddaughter contribute $6,000 into a Roth IRA for each of the next 5 years. If she invests the $30,000 in a low-cost mutual fund or exchange traded fund (ETF) which earns 7.5% annually – a reasonable guesstimate -- it would be worth over $1 mm in 50 years, just as she is ready to retire.

Contributing to a Roth IRA isn’t always the best way to help a young person financially. If they are saving for college, a 529 college savings account may be better. If they are saving for a house, a savings or regular brokerage account may be better. If they are struggling financially and in debt, writing them a check may be better.

But if they can afford to plan for retirement, the Roth IRA is truly the gift which keeps on giving.

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This article is not intended to provide tax, legal, accounting, financial, or professional advice. Readers should seek advice from qualified professionals who can review their specific circumstances. Old Peak Finance endeavors to provide information that is accurate and current. However, we cannot guarantee that this information has not been outdated or otherwise rendered incorrect by new research, legislation, or other changes. Old Peak Finance has no liability or responsibility to any individual or entity with respect to losses or damages caused or alleged to be caused, directly or indirectly, by the information contained on this website.

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