How To Make an IRA Contribution as a Gift

Core Points - The article discusses the rules and limitations surrounding gifting contributions to Individual Retirement Accounts (IRAs), emphasizing the importance of the recipient's taxable compensation and the annual contribution limits set by the IRS [1][2][5][20] Group 1: Contribution Limits and Requirements - Total contributions to traditional and Roth IRAs must not exceed the IRS's annual overall contribution limit, or else penalties will apply [2][6] - Contributions, whether made by the account holder or as a gift, cannot exceed the recipient's taxable compensation for the year [2][8] - A key advantage of IRAs over 401(k)s is that almost anyone with earned income can open and self-manage an IRA, making it a suitable option for those looking to assist others with retirement savings [3][4] Group 2: Gifting to Minors - Gifting contributions to a minor's IRA requires the establishment of a custodial account, which is controlled by a guardian until the child reaches the age of majority [5][12] - Contributions to a custodial IRA must not exceed the annual limit or the child's earned income, whichever is lower [13][16] - The custodian can make contributions on behalf of the child, and these funds do not need to be deposited directly by the child [16][20] Group 3: Tax Considerations - Contributions to an IRA as gifts do not typically trigger gift tax issues, provided they remain within the annual exclusion limit [17] - Roth IRAs for children are funded with after-tax dollars, which can provide significant tax benefits upon withdrawal, depending on the financial goals of the giver [19][20]