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How to Give a Roth IRA Gift

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Qualified Roth Individual Retirement Accounts (IRAs) help save and invest money for retirement without paying taxes by depositing contributions using funds that have already been taxed. Once the money is deposited into the account, it will not be taxed on its growth or on withdrawals made after reaching age 59 and a half.

Can you gift a Roth IRA?

You cannot directly give a Roth IRA to someone else, but you have some similar options:

  • You can withdraw money from your Roth IRA and give it to someone else.
  • You can leave the Roth IRA to a beneficiary upon your death.
  • You can contribute to a Roth IRA for someone else.

Withdrawing money from your Roth IRA

If you are 59 and a half or older, you can withdraw money from your account without any penalties. This money can be given to anyone, but you must adhere to specific rules set by the IRS regarding the amounts that can be gifted to someone else each year.

If you are 59 years old or younger, you can still withdraw the amount of money you contributed to the account without any penalties. If you withdraw any earnings, you may incur a 10% penalty.

Note: You must wait five years after opening your account before withdrawing any earnings.

Leaving a Roth IRA to a beneficiary

Upon the death of the original owner of a Roth IRA, the account becomes the property of the designated beneficiary. If the beneficiary is the original owner’s spouse, they take ownership of the account. They may also choose to roll it into one of their own qualified retirement accounts.

If the beneficiary is not the original owner’s spouse, they cannot take ownership of the account. Instead, the account becomes an inherited IRA, and it must be distributed within ten years.

Note: There are some beneficiaries exempt from the ten-year rule, including minor children returning to the original owner, individuals with chronic illnesses or disabilities, and individuals who are less than ten years younger than the original owner.

Giving Roth contributions as a gift

The final option is to give money to the person, who can then contribute it to their own account. Although it may seem straightforward, gifting Roth IRA contributions involves some important considerations.

How to give Roth IRA contributions as a gift

The first step is to determine whether the recipient is eligible to contribute to a Roth IRA based on their adjusted gross income (AGI) and tax filing status. Here are the income limits for 2022:

  • Single individuals can contribute the full amount if their adjusted AGI is less than $129,000, a reduced contribution if their adjusted AGI is between $129,000 and $144,000, and cannot contribute if their adjusted AGI is more than $144,000.
  • Married couples can contribute the full amount if their combined adjusted AGI is less than $204,000, a reduced contribution if their combined adjusted AGI is between $204,000 and $214,000, and cannot contribute if their combined adjusted AGI is more than $214,000.

If the recipient is married and files a separate tax return, contribution amounts depend on their income and whether they live with their spouse for any part of the year.

Note: In 2022, the maximum contribution limit for a Roth IRA is $6,000. An additional contribution of $1,000 is allowed if you are age 50 or older.

Additionally, the recipient cannot contribute more to a Roth IRA than the income they earned for the year. This means they will need to earn at least the contribution amount in the year the gift is made. Earned income can include any income reported to the IRS, such as wages, salaries, tips, and self-employment income.

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Roth IRA Custodial Accounts

Individuals under the age of 18 cannot open a Roth IRA account without an adult custodian. If the gift recipient is under 18 (or 21 in some states), they will need to open a custodial Roth IRA account. Once they reach the age of majority in their state, the recipient can transfer their custodial account to a regular Roth IRA and manage it themselves.

Gift Tax Impact on Roth IRA Contributions

The IRS allows you to give someone a certain amount in annual gifts without any tax obligation. For the year 2022, the gift tax exclusion amount is $16,000. Any amount over $16,000 gifted to one person is subject to gift tax, which is typically paid by the donor. Gift tax does not apply to gifts you give to your spouse.

Note: The annual gift exclusion changes from year to year. Please check the IRS website for the most current figure.

Since the gift tax exclusion amount is greater than the annual contribution limit for a Roth IRA ($6,000), the donor and recipient typically will not be responsible for paying taxes on gifted Roth IRA contributions. However, if the donor also gives other gifts to the recipient during the year, they should check to see if those amounts add to the exclusion amount.

In this case, the donor will need to file IRS Form 709 and may owe gift tax. The good news is that in addition to the annual exclusion, there is a lifetime exclusion amount for lifetime gifts and estates. You do not have to pay gift taxes until you exceed that amount, which is $12,060,000 for the year 2022.

Special Rules for Spousal Roth IRA Accounts

There are spousal Roth IRA accounts that allow one spouse to contribute on behalf of both spouses even if only one has earned income. Remember, you can only contribute from the amount of earned income you made during the year into the Roth IRA account.

In general, couples can contribute a maximum annual contribution limit for each person based on their age:

  • Under 50: $6,000. 50 or older: $7,000.

For example, if you are both in your mid-40s, you can contribute up to $12,000. If one of you is over 50, you can contribute up to $13,000.

Note: Your total combined contributions must be less than or equal to the taxable income reported on your joint tax return for the year.

Frequently Asked Questions

Can you gift money from a Roth IRA without paying taxes?

You can gift money from a Roth IRA without paying taxes, as long as you meet certain conditions. First, you must be age 59 and a half or older and taking qualified distributions. Then make sure you are gifting less than the annual exclusion amount (for 2022, it is $16,000).

What are the distribution rules for an inherited Roth IRA?

Inherited Roth IRA accounts must be distributed within ten years unless the beneficiary is a minor, the spouse of the original owner, a disabled or chronically ill person, or someone who is less than ten years younger than the original owner.

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