Giving - Or Getting - The Gift of an IRA

A little gift box! (X1)

Executive Summary

You can give a lot of money away over your lifetime without triggering any gift taxes.  A donor can use this to help contribute to a wage-earning donee's Roth IRA with little hassle and no extra tax forms.


Have a relative or mentor who might be interested in making an extremely long-term investment in your future?  If you can convince them it's a good idea, it's completely legal for them to finance your IRA contributions all the way up to your annual contribution limit (as described in my Roth IRA investment introduction).

On the other side of the equation and have a relative or mentee you'd like to introduce to the importance of long-term savings and investment?  Helping them to contribute to an IRA could be the perfect opportunity.  Perhaps you can think of a clever way to incentivize their retirement savings plan contributions with your own version of 'corporate matching', teaching them several important concepts at once!  As long as they have earned income (i.e. they're issued a Form W-2 by the employer), there's no minimum age requirement for opening an IRA.

Gift Tax Rules

If these contributions are made to a Roth IRA, they'll have no tax consequences for the gift-giver or the gift receiver.  Under current tax law, any individual can give away up to $14,000 per person per year - the 'gift tax annual exclusion' - to an unlimited number of people without even reporting it (1).  A married couple can each give $14,000 per person per year.

The Lifetime Exemption

What happens if you gift beyond the annual exclusion limit?  You must report this on IRS Form 709 and you may owe taxes (2,3).  The key points (4,5):
  1. While you must report the entire amount of the gift to the IRS, only the amount over the Annual Exclusion is considered for taxation.
  2. In addition to the Annual Exclusion, all individuals also have a Gift Tax Lifetime Exemption - currently $5,250,000 in 2013.
  3. Each time you gift more than the Annual Exclusion, the value of the gift over the Annual Exclusion is subtracted from the Lifetime Exemption.
  4. You are exempt from gift taxes until you have depleted your entire Lifetime Exemption.
  5. At death, your estate's assets up to the value of your remaining Lifetime Exemption (and the remaining Lifetime Exemption of your spouse) is exempted from federal estate taxes.
The Tax Reform Act of 1976 merged the gift and estate tax exclusions, but they were separated in 2001 as part of George W. Bush's plan to completely repeal the estate tax by 2010 (6).  The gift and estate tax rates were re-unified at a maximum rate of 40% by President Obama's American Taxpayer Relief Act of 2012 (7).  See an infographic of historical estate tax rates in my previous post on the topic.

(1) 2013 Gift Taxes - http://www.irs.gov/uac/2013-Inflation-Adjustments-to-Various-Tax-Benefits
(2) IRS Form 709 - http://www.irs.gov/pub/irs-pdf/f709.pdf
(3) IRS Form 709, Instructions - http://www.irs.gov/pub/irs-pdf/i709.pdf
(4) Gift Tax Exemption - http://wills.about.com/od/understandingestatetaxes/a/gift-tax-chart.htm
(5) Wikipedia: Estate Tax in the US - http://en.wikipedia.org/wiki/Estate_tax_in_the_United_States
(6) IRS, Historical Overview of the Estate Tax - http://www.irs.gov/pub/irs-soi/ninetyestate.pdf
(7) American Taxpayer Relief Act: http://en.wikipedia.org/wiki/American_Taxpayer_Relief_Act_of_2012
(X1) Gift graphic: http://openclipart.org/detail/36991/cadeau-by-antoine