December 22, 2022
You’ve started investing. Congratulations! Investing for the future using a Roth individual retirement account (Roth IRA) is a savvy choice that can save thousands in tax fees down the road. But here’s the question: Are you the only one who can contribute to your Roth IRA, or can other people contribute for you?
The short answer is yes, other people can contribute to your Roth IRA on your behalf. There are two specific types of Roth IRAs that are set up precisely for this: a custodial Roth IRA and a spousal IRA. While both types still require earned income to open the account, contributions can be made on your behalf.1,2
KEY TAKEAWAYS
- Roth individual retirement account (Roth IRA) eligibility is based on earned income. Once that income is earned, the funds to invest in your Roth can come from other sources.3
- Custodial IRAs are available for minors. Parents or loved ones will often contribute on their behalf, up to the amount that the minor has earned.1
- A spousal Roth IRA offers the opportunity for a nonworking spouse to invest in a Roth IRA using the earned income of their spouse. To qualify, they must file joint taxes.2
How a Custodial Roth IRA Works
A custodial Roth IRA is a Roth IRA that is opened for a minor. Since most investment platforms, whether they are banks or brokerages, won’t allow a person under the age of 18 to open an account, a parent or guardian must open the account for them.
At that point, the person in charge of the account can contribute up to the amount of income earned by the minor, or the maximum contribution amount—whichever is less. The maximum contribution amount is $6,000 in 2022 and $6,500 in 2023. For both 2022 and 2023, there is an additional $1,000 catch-up contribution for those aged 50 and older.4,5
Traditional IRAs have the same contribution limits as Roth IRAs.5
Minors who earn income through babysitting, lawn mowing, or part-time jobs at the family business or a local retailer or restaurant may not wish to stash all of their hard-earned money in a retirement account. In this case, contributions can be made on their behalf by parents, grandparents, other family members, or loved ones.
Some families see a Roth IRA as an opportunity to match the child’s donation as a way of encouraging them to save. All of this is allowed as long as the amount contributed doesn’t exceed the amount that the child actually earns in a year, or the maximum contribution limit, if the child earns more than that amount.5
How a Spousal IRA Works
In partnerships where one spouse earns income and the other doesn’t, a spousal Roth IRA is an option. All Roth IRAs are subject to income restrictions. In the case of a spousal Roth IRA, the Internal Revenue Service (IRS) would use the threshold normally designated for couples with two working partners. In 2022, that limit is $214,000 ($228,000 in 2023). Couples must file their taxes as married filing jointly to qualify for a spousal Roth IRA.6,7,8
Once the account is established, it acts just like a regular Roth IRA. The holder or their spouse can contribute $6,000 per year (or $7,000, if they are age 50 or older) in 2022. For 2023, the amounts are $6,500 and $7,500, respectively. The ability to open two Roth IRAs despite earning only one income can create a huge savings opportunity for couples.7,5
There is one stipulation to keep in mind: The total of the contributions into both IRAs—the one belonging to the wage earner and the one in the spouse’s name—cannot exceed the total amount of the taxable compensation on their tax return.5
Can My Employer Put Money in My Roth Individual Retirement Account (Roth IRA)?
No. An IRA is an individual account that you establish and maintain for your retirement. An employer does not have access to the account; however, an employer can offer a Roth option within their 401(k), 403(b), or 457(b) plan that will still garner the same tax advantages, only using direct payroll contributions. This is sometimes referred to as a designated Roth account.9
Are Someone Else’s Contributions to My Roth IRA Limited?
Yes. Whether you or someone else is contributing to your Roth IRA, the contributions cannot exceed the maximum contribution set by the Internal Revenue Service (IRS) for that year ($6,000 for 2022, or $7,000 if age 50 or older; $6,500 for 2023, or $7,500 if age 50 or older) or the maximum amount of income earned—whichever is less. In the case of a custodial Roth IRA, that means that if your loved ones are contributing on your behalf, they must know the amount of money that you earned. Be sure to coordinate your contribution efforts to avoid the 6% penalty for excessive contributions.5
Can Someone Put Money in My Roth IRA on My Behalf?
To contribute to a privately held Roth IRA, someone would need your account information. As long as you are willing to provide that, someone else could contribute to your Roth IRA on your behalf as long as it didn’t exceed the contribution limits and you still qualify based on your income.
The Bottom Line
IRAs are, by their very existence, funded by the individual holding them. If you have a custodial, spousal, or designated Roth IRA, then as long as the contributions don’t exceed preset limits, there is no issue with someone else giving you the money to invest.
This article was originally published in Investopedia on December 20, 2022, and written by Rachel Murphy.
2. Image courtesy of iStock
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Article Sources
1. Charles Schwab. “Schwab Custodial IRAs PDF”
2. Internal Revenue Service. “https://www.irs.gov/pub/irs-pdf/p590a.pdf“
3. Internal Revenue Service. “https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2023”
4. Charles Schwab. “Schwab Custodial IRAs PDF”
5. Internal Revenue Service. “https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits”
6. Internal Revenue Service. “https://www.irs.gov/pub/irs-pdf/p590a.pdf”
7. Internal Revenue Service. “https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-rises-to-6500”
8. Internal Revenue Service. “https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2022”
9. Internal Revenue Service. “https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts”
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