Can I fund my Roth IRA with tax free money?

[neophyte]

Wait, what, how?  Long story short, my father had a UGMA account for me to pay for college. College has been over for a while now and I just got access to this account earlier this year. My father won't talk about me giving the money back, so I guess it's mine. A few weeks ago, just after I transferred some money to Vanguard to fund my Roth IRA it hit me: my earnings are low enough that I don't have to pay capital gains tax!

Can I fund my Roth IRA with money from the UGMA account?! And does it make sense to do that? The way I see it, I could move $5,500 per year from a taxable account to a tax free account, and that would free up the money that I would have otherwise been contributing to my Roth IRA to put in my 403b.  All of my accounts (IRA, UGMA, 403b) are at Vanguard.  Can I really do that?  Are there potential pitfalls I need to watch out for?

[GGNoob]

It makes a lot of sense to do this every year, as long as you have $5,500 of earned income. If you have a job with a 401k, you can even contribute more to that and live off of the UGMA account until it's gone and you have more in tax advantaged accounts.

BTW, the law says the UGMA money is yours so it's not something you have to give back just because you didn't spend it all on college.


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[seattlecyclone]

Yes, this is absolutely allowed so long as the amount you move over each year doesn't exceed your earned income.

[neophyte]

Awesome!  I feel like I just found free money! I'm more in danger of going over the 0% capital gains tax bracket than under $5500 per year (fortunately!), so no worries about that. I did realize I'll still have to pay state capital gains tax, but that should be relatively minor.

BTW, the law says the UGMA money is yours so it's not something you have to give back just because you didn't spend it all on college.

The idea of giving it back to my dad was more about what my gut said than what the law says. But he won't hear of it, so the current plan is to use it to fund my IRA.  With luck I'll be able to max my IRA for quite a while without drawing down the balance much, and I can keep the UGMA account as a sort of back-up emergency account for my parents if they end up needing long term care or something like that.

[teen persuasion]

Yes, I fund our Roths with our tax refunds, which are primarily refundable credits.  DH contributes as much as possible to his 401k, lowering our wages and AGI so we owe little or no tax and qualify for more EITC.  Our state matches EITC at 30%, and  the CTC at 33%, so that gets a bump, too.