Roth IRAs and Gifting

A recent mutual fund study suggests that newly employed workers should contribute between 15-17 percent of their earnings to a retirement plan each year.  The problem, however, is that young workers may have school debt, mortgages, among other payments.  Hence, the suggested level is oftentimes unrealistic. 

Although individuals can save more later in life, the compounding cannot be duplicated.  Furthermore, there is no ability to “catch up” on missed annual 401(k) or IRA windows that expire each year if they go unused.  So what can be done?

The $14,000 (or smaller) annual exclusion gifts that a grandparent or a parent may wish to make to reduce their estate taxes, or simply to help out the donee, may be the best solution.  Rather than writing a single check, the donor can write two: one for the child for general assistance and a second in the amount of $5,500 for deposit into a newly established Roth IRA account. 

“With the Roth IRA strategy, there are no complex trusts, no separate tax returns and minimal administration expenses.  Can you think of a better gift than that?”

See John t. Bannen, Annual Gifts to Give a Child—Roth IRA Accounts vs. Cash, Quarles & Bradley LLP, Oct. 21, 2014.