It may be technically possible to contribute directly to someone else's IRA, but there's more to consider.
Knowing the type of IRA, possible tax-deductibility concerns, and timing to avoid excess contributions for the recipient is also important.
From gifting to planning to direct payment of medical expenses, there's more than one way to help your parents with retirement.
My finances are on track and I'm trying to help my parents get there as well. I'd like to give them a gift towards their upcoming retirement. Could I contribute directly into one of their IRAs?
How fortunate your parents are, not only that you're on top of your own finances, but that you also want to share your good fortune with them. I often talk about one generation helping the other and usually it's the parents helping the child. It's great to see an example of how it can work the other way as well.
Regarding contributing directly to your parents' IRAs, some financial institutions will allow you to write a check payable to an IRA account owner or to the financial institution FBO (“for the benefit of”) the account owner. However, even if you can technically do it, there's more to think about because IRA rules and regulations are very specific.
Verify your parents' earned income
To contribute to an IRA, an individual must have earned income equal to or greater than the contribution. Contribution limits for 2016 and 2017 are $5,500 with a $1,000 catch-up for those age 50 or over. So theoretically, if your parents are at least 50, you could contribute up to $6,500 to each of their IRAs as long as they had earned income equal to at least that amount.
But what if one parent has enough earned income and the other doesn't? In that case, there's the option of what's called a spousal IRA. With a spousal IRA, a contribution can be made to the IRA account of the non-earning spouse as long as the other spouse's earnings equal the amount of the contributions for both.
If earned income isn't an issue and your parents' financial institution will let you contribute directly to their IRAs, you're almost there. But you should get a few more facts before deciding to write the check.
Get the details on the type of retirement accounts they have
It sounds as if each of your parents already has an IRA account. The next question is what type? This is important in terms of the possible tax deductibility of their contributions. Another question is whether or not they still contribute to an employer sponsored plan like a 401(k). Having the answers to these questions will help you decide where to direct your contributions. Here are some things to be aware of:
- Traditional tax-deductible IRA—Contributions to a traditional IRA can be fully tax-deductible. However, if someone participates in an employer sponsored retirement plan such as a 401(k), tax deductibility is phased out at certain income levels. For tax-year 2016, the levels are $61,000-$71,000 for single filers, $98,000-$118,000 for married filing jointly. Likewise, when married filing jointly, if your spouse participates in a retirement plan but you don't, tax deductibility phases out between $184,000-$194,000.
- Roth IRA—There's no upfront tax deduction for a Roth IRA. And there's no restriction if you participate in an employer plan. However, there are income limits that determine Roth IRA eligibility. For tax year 2016, the limits are $117,000-$132,000 for single filers, $184,000-$194,000 for married filing jointly.
These income limits go up slightly for tax year 2017. There's also a tax on excess contributions, so you need to know what your parents may have already contributed for the tax year. Best to discuss all this with them and find out where they'd prefer that you direct your contribution.
Consider other ways to help
A direct contribution to one of your parents' IRAs is a great idea and, in the right circumstances, could be the simplest. However, there are other ways to help them that you might also want to consider.
For instance, there's a lot that goes into planning for retirement. Have they thought about what their expenses will be in retirement? Do they have a plan for drawing income from their various resources, whether Social Security, a pension or a 401(k) or IRA? If they don't have a financial advisor, a great gift could be a recommendation to someone you trust and picking up the tab for a retirement consultation.
You could also choose to gift them a certain amount and let them decide where best to put it. In 2017, you can give up to $14,000 to any number of individuals without incurring a gift tax. And there's no tax to the recipient.
Another option is to pay directly for medical costs. This can be a big drain for retirees. And, again, there's no gift tax for either giver or receiver.
Be there for each other
However you're able to aid your parents as they approach retirement, the fact that you want to help is perhaps the greatest gift of all. But don't make it a one-time gesture. Let your parents know that you're always there to discuss ideas, problems and solutions.
Be willing to listen to their advice as well. Learn from their experience to make sure you have your own retirement plans in place. That way you can enjoy all the future years together, each of you being there for the other and knowing that you're all on the right track.