Author Topic: Roth for adult children?  (Read 3200 times)

Spondulix

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Roth for adult children?
« on: April 24, 2015, 01:43:10 PM »
My father in law decided to give my husband some money in the form of a Roth IRA. I don't know how much it's going to be (my husband says just a couple thousand) or if this is going to be an ongoing thing. FIL said its a way he can give us some money without being taxed down the road (so part of estate planning). It's a total surprise, but much appreciated.

We got paperwork for a new account (Roth rollover?) in my husband's name. I don't think DH is a beneficiary - the account is actually in his name and FIL is listed as contributor. I've never really heard of this, so I'm trying to find some general info on how this works.

If FIL is putting money in, will he get taxed (or will we)?
My husband has been contributing to a Roth - does this change his yearly max this year?

I know very little about estate planning - is this even a good plan?

MDM

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Re: Roth for adult children?
« Reply #1 on: April 24, 2015, 02:40:46 PM »
A person can give another person $14K/yr without incurring gift tax or affecting future inheritance taxes - so from that perspective, "thanks Dad!"

But your own Roth IRA accounts can receive total contributions of no more than $5500/yr from all sources (and no more than the amount of your own earned income).

seattlecyclone

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Re: Roth for adult children?
« Reply #2 on: April 24, 2015, 02:41:27 PM »
IRAs are individual accounts. You can't roll over an IRA from one person to another. Your FIL could put money in an IRA in your behalf, but this would eat into the amount you could contribute to an IRA out of your own funds, and would be subject to any other contribution limits that you may have based on your income.

You would not owe any tax related to this contribution. If your FIL happens to give you more than the annual max for reporting (about $14k), he'll have to report it on a gift tax return, but even then no tax would be owed until the total of gifts plus estate value exceeds the lifetime max of over $5 million.

jexy103

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Re: Roth for adult children?
« Reply #3 on: April 24, 2015, 04:42:18 PM »
Also, Roth IRAs are funded with post-tax money, meaning your FIL already paid the income tax on that money. The money in the Roth can now grow tax-free and be withdrawn tax-free when the time comes.

Others have already responded about the gift tax.

BlueMR2

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Re: Roth for adult children?
« Reply #4 on: April 24, 2015, 04:49:17 PM »
A person can give another person $14K/yr without incurring gift tax or affecting future inheritance taxes - so from that perspective, "thanks Dad!"

But your own Roth IRA accounts can receive total contributions of no more than $5500/yr from all sources (and no more than the amount of your own earned income).

To be specific "your own earned income" includes spouses.  So, in my situation, my wife makes less than $5000, but receives a gift of $5000 to put into her Roth, she can still put it in as my earnings cover it.

Spondulix

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Re: Roth for adult children?
« Reply #5 on: April 25, 2015, 12:11:57 AM »
IRAs are individual accounts. You can't roll over an IRA from one person to another. Your FIL could put money in an IRA in your behalf
I think this is what's happening - it's a Roth IRA with some brokerage FIL has a relationship with, but FIL is putting the money in. But even though it's a Roth in DH's name, we won't have to pay taxes because it's a gift, correct?

Giving money this way is kind of unusual, right? I'm a bit confused by the whole thing - and we actually may not be eligible for Roth this year (because of high income). I'll probably follow up with FIL and his company, but wanted to make sure I wasn't missing something first.
« Last Edit: April 25, 2015, 12:13:56 AM by Spondulix »

MDM

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Re: Roth for adult children?
« Reply #6 on: April 25, 2015, 12:46:38 AM »
I think this is what's happening - it's a Roth IRA with some brokerage FIL has a relationship with, but FIL is putting the money in. But even though it's a Roth in DH's name, we won't have to pay taxes because it's a gift, correct?
As far as gift itself, you are correct - no taxes.

Quote
Giving money this way is kind of unusual, right? I'm a bit confused by the whole thing - and we actually may not be eligible for Roth this year (because of high income). I'll probably follow up with FIL and his company, but wanted to make sure I wasn't missing something first.
Yes, it's a very nice gesture.  DH, however, should say something similar to "Dad, that's really generous of you - thanks! - but I know you wouldn't want this to get us in trouble with the IRS so could we talk about the details?"

seattlecyclone

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Re: Roth for adult children?
« Reply #7 on: April 25, 2015, 01:26:26 AM »
IRAs are individual accounts. You can't roll over an IRA from one person to another. Your FIL could put money in an IRA in your behalf
I think this is what's happening - it's a Roth IRA with some brokerage FIL has a relationship with, but FIL is putting the money in. But even though it's a Roth in DH's name, we won't have to pay taxes because it's a gift, correct?

Giving money this way is kind of unusual, right? I'm a bit confused by the whole thing - and we actually may not be eligible for Roth this year (because of high income). I'll probably follow up with FIL and his company, but wanted to make sure I wasn't missing something first.

I'm pretty sure that as far as the IRS is concerned, this is the same as if your FIL gave you cash that you then put in a Roth IRA. If you can't contribute to a Roth IRA on your own, your FIL can't do it on your behalf. Maybe a backdoor contribution would be in order? Or he could just give you the cash.