Ask Kim
The Gift of a Roth
A parent asks Kimberly Lankford to explain the rules of funding an account for a child and how the money should be invested.
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
February 8, 2010
I would like to fund a Roth IRA for my 25-year-old daughter. She is a third-grade teacher and already saving for retirement. Could you suggest some appropriate funds? Would she have to pay taxes on this money?
Helping finance your daughter’s retirement is a great idea. Even if she has a 403(b) from her job as a teacher, adding a Roth is a good way to diversify her retirement savings. Unlike funding a 403(b), contributing to a Roth doesn’t give your daughter a tax break now. But she’ll be able to withdraw the money tax-free after age 59½, and she can withdraw the contributions at any time tax-free and without penalties.
The deadline for 2009 IRA contributions is April 15, 2010. You can give her the money to contribute to the account, but she needs to meet the Roth income limits; if she’s single, her adjusted gross income must be $120,000 or less ($176,000 or less for couples) to contribute to a Roth for 2009. And you won’t face any tax consequences for the gift as long as you give her $13,000 or less for the year.
If your daughter won’t touch the money until she retires, she can afford to put all of her money into stocks. Until she has enough money to build a diversified portfolio, she should start with a global stock fund -- one that invests in both U.S. and foreign stocks. Two good choices, both with a bent toward undervalued stocks, are Oakmark Global I (symbol OAKGX) and Dodge & Cox Global (DODWX). Neither levies a sales charge. If your daughter wants to tamp down risk further, a global balanced fund -- one that owns stocks and bonds from both U.S. and foreign markets -- may be appropriate. One of the few no-load funds in this category is Fidelity Global Balanced (FGBLX).
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Reader Comments (5)
Posted by: Ray M. at 02/09/2010 05:05:00 PM
I read in IRS regulations that a person could not contribute more than the maximum ($5000 or $6000 catch up amount) total to both a Roth IRA and a regular IRA. For example if one put $2500 into a Roth IRA, one would be limited to $2500 in the regular IRA, unless using the catch up amount. Does this rule apply if my daughter puts $5000 into her IRA and I put $5000 into her Roth IRA.
Posted by: Kim Lankford at 02/10/2010 08:55:26 AM
Hi Ray, this is Kim Lankford. You are right -- you can only contribute up to $5,000 for the year to an IRA for yourself ($6,000 if you're age 50 or older; and you can also contribute to an IRA on behalf of a spouse who doesn't work). But you can give your daughter the money to contribute to the IRA herself. As long as you don't give her more than $13,000 for the year, you won't face any gift-tax consequences. Hope this helps.
Posted by: DON MESSERSMITH at 02/10/2010 08:55:29 AM
IF RETIRED, 67 YRS. OLD AND NO GAINFUL INCOME EXCEPT INVESTMENTS----------CAN A PERSON INVEST IN ROTH? THANKS, DON
Posted by: Kim Lankford at 02/10/2010 11:38:43 AM
Hi Don, this is Kim Lankford. You must have earned income to contribute to an IRA, so if your only income is from investments, then you wouldn't be eligible to contribute to an IRA for the year. If you're married and your spouse works, however, then she can contribute to an IRA on your behalf -- up to $6,000 for the year, since you're 50 or older, although the total contributions for the two of you combined cannot exceed her earned income for the year. If she earns more than $12,000 for the year, for example, then you can both contribute the maximum $6,000. The spousal IRA can be either a traditional or a Roth IRA. To qualify for a Roth, the adjusted gross income on your joint return must be less than $176,000 in 2010. I hope this helps!
Posted by: Ken at 02/10/2010 11:52:24 AM
The total IRA contribution whether regular or Roth is only $5000 per person for 2009 and same amount in 2010. You can only contribute if you have EARNED income, not investment income, social security income, etc.