Give the Gift of a Roth IRA

E*TRADE Securities2

02/14/17

No matter what the occasion, the joy of giving gifts may give way to the reality of toys lost and clothes soon tossed. Luckily, there is a gift that could make a lasting impact and maybe surprise someone you love when they least expect it. Consider giving the gift of a Roth IRA. Granted, it might not have the same “wow factor” as a new bicycle, but with some time to grow, this gift may help solidify a loved one’s finances later in life when they might need it the most.

 

What is a Roth IRA?

 

A Roth IRA is a tax-advantaged account that allows an individual to save a portion of their earned income for retirement. Unlike a Traditional IRA, contributions to a Roth IRA are not tax-deductible. However, a Roth IRA provides important tax benefits. It offers tax-free growth potential for contributions, tax-free distributions of contributions at any time, and tax-free distributions of earnings, provided the account is open for at least five years and the account holder doesn’t begin taking distributions until age 59½. This may be a benefit to children, grandchildren, nieces, or nephews down the road, and can teach them lifelong lessons about the importance of financial planning, saving, and investing.

 

How does gifting a Roth IRA work?

 

One potential issue for individuals just entering the workforce is that they may not have any money left at the end of each paycheck to save for retirement. That’s where gifting a contribution to a Roth IRA comes in to play. An individual can make a contribution on another person’s behalf, as long as the total annual contribution does not exceed their earned income for the year, or $5,500, whichever is less. Exceeding the annual IRS contribution limit may subject the IRA to a 6% excise tax. Consider keeping track of a loved one’s earned income and the aggregate contribution each year to avoid incurring a penalty.

 

How can a Roth IRA be set up?

 

Giving the gift of a Roth IRA is simple. There are two ways this can be accomplished:

1. Establish an E*TRADE Roth IRA for Minors for any child who has earned income, but who has not yet reached the age of majority (which varies by state, but generally ranges from ages 18 to 21). With this arrangement, a parent or guardian acts as a custodian of the account for the benefit of the child until he or she reaches the age of majority. After that time, the assets in the account are transferred into the name of the child.

2. If your child or someone else that you care about is over age 18, they can establish a Roth IRA on their own. The process of opening an E*TRADE Roth IRA online is simple and takes only about 15 minutes. There are a few rules to be aware of before opening a Roth IRA for a loved one:

  • The loved one or child must have earned income, which usually is in the form of salaries or wages. Unfortunately without earned income, they would not be eligible to contribute to a Roth IRA.
  • There are income restrictions when contributing to a Roth IRA. For the 2016 tax year, if the loved one or child has a modified adjusted gross income (MAGI) above $132,000, he or she won’t be able to contribute to a Roth IRA. In 2017, this limit rises just a bit to $133,000.

 

Next steps

 

Gifting an E*TRADE Roth IRA may be a great way to give a loved one or child a head start on saving for retirement. Roth IRAs allow for even small contributions to potentially grow over time with the power of compounding, and inspires good financial habits. Talk about the gift that can help keep on giving! Download a gift card to gift an E*TRADE Roth IRA today, and don’t hesitate to call an E*TRADE Financial Consultant or 1-877-800-1208 for assistance.

Important Details about an IRA for Minors:

  • The parent or legal guardian of the minor must read and sign the account application.
  • A portion or the entire amount of a loved one’s earned income can be contributed for the year, as long as the aggregate annual contribution to the minor’s IRA does not exceed their earned income for the year or $5,500 (the IRS contribution limit for IRAs in 2016 and 2017), whichever is less. Exceeding the annual IRS contribution limit may subject the minor’s IRA to a 6% excise tax, so it will be important to keep track of the minor’s earned income and the aggregate contribution to the minor’s IRA each year to ensure that a contribution does not subject a loved one to a penalty.
  • Because the contribution is made to the minor’s IRA, the minor will receive any eligible tax deduction.
  • The minor must file a U.S. income tax return for any year in which a contribution is made to the minor’s IRA.
  • Any contribution made to a minor’s IRA is irrevocable.
  • Control of the minor’s IRA transfers to the minor when the custodianship terminates (generally when he or she reaches the age of majority).
  • The minor’s IRA is subject to the same tax, penalty and early withdrawal rules applicable to Traditional or Roth IRAs.