Can a parent make a Trad/Roth IRA contribution on behalf of a child?

[Guest amfam2]

Lets assume for all purposes that the child involved has enough earned income (i.e. wages, not allowances) to support an IRA contribution:

1. For children who are under age 21: can a parent make a Trad/Roth IRA contribution on behalf of their child? (This question also assumes that if the parent can do this, the deduction for the contribution (if any) appears on the child's return). Does your answer change if the child is included as a dependent on their parent's return?

2. For adult children - assume older Mom & Dad want to reduce their estate and decide to make Trad/Roth IRA contributions for their adult children and/or grandchildren. (Again, assumes that if older Mom & Dad do this, the children will take the deduction on their own returns).

For some reason I have trouble with these two transactions, but cannot really put my finger on why (except that the paper trail between the contribution & the deduction isn't exactly nice, neat & clean).

For #2, I have assumed that these contributions fall below the annual $11,000 gifting rules. I am not aware of any interplay between the annual $11,000 gift rules and the rules for making the Trad/Roth IRA contributions.

I am interested in your thoughts......

[Guest duh]

There are no age minimums for an IRA, the only requirement is that of earned income. If the person is a minor they are unable to hold securities in their own name. They open up an ira at a bank and suffer through cd rates until they are 18. I have read numerous articles about "retiring your child" by making contributions for them from the time they are 16 until they are around 22.

The premise behind this is to have your child work summers earning enough to fund an IRA. You give them the money back, or if you're like me, you'll give them the the money plus a bunch more. The time value of money takes over from there and before you know it, they retire with a nice balance. I would suggest taking it a step further and using a Roth. No taxes when they take distributions.

[John G]

There is no major problem with either scenario. The parent, grandparent, uncle can fund the IRA/Roth for anyone in the family. For that matter, I think there are no restrictions with a neighbor being the funding source. (my family has a lot of unusual links for IRA funding)

If you are talking Roth (which seems to me to sensible in most scenarios) then there is no deduction issue for anyone. The deduction would belong to the child - and they rarely need it, tipping the math in favor of Roths.

There are some minor problems (excuse the pun) for children IRAs.

The first issue is finding custodian. Etrade for example will not accept a minor IRA. However, Schwab does. Some custodians will require the account to be set up as a custodial acct with a parent of guardiand taking charge. Each custodian will have a range of investments that they will allow. There is no reason to feel that you are restricted to just a local bank or that a childs IRA can not have mutual fund or stock holdings. Note, I am opening up an extra thread on this subject and asking folks to show some examples that work.

The second issue is having a clear eligibility due to earning income - payroll is easy to document while babysitting, lawn mowing or a newspaper route are more difficult. Note, however, I do not know of anyone who got an IRS notice to prove earned income for a child's IRA.