Dear Senior Living Adviser,
Can I set up a Roth IRA for my grandchildren? They are 25, 22 and 17. We are getting some income from oil royalty interests and wondered about using that to pass some income on to them.
Would the process have any tax advantages for us?
— Raleigh Roth
The grandchildren can only fund Roth IRAs up to the lesser of their taxable compensation for the year or $5,500, even if it’s with your money. If they don’t have taxable compensation, they can’t fund a Roth IRA.
It’s common for family members to try to jump-start the younger generation’s Roth IRAs by contributing on their behalf, but you can’t if they don’t have the earnings from working. There are other limitations, too, but it’s unlikely that those limitations apply to your grandchildren when setting up a Roth IRA. See IRS publication 590 for all the requirements.
There are plenty of ways to give money to your grandchildren. The annual exclusion for gifting to each grandchild in the 2015 tax year is the same as in 2014. It’s $14,000, or $28,000 if you’re married and file a joint tax return, when you split gifts.
If you’re looking to gift income that your grandchildren will keep invested for their future, there may be estate planning options that are a better idea than funding Roth IRAs that give you no control over how they use that money. Work with your attorney and accountant to discuss these options.
I’m not aware of a way for you to gain a tax advantage by gifting the royalty income to your grandchildren. Consult a tax professional to discuss potential advantages.
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