My granddaughter is 23 years old. She is currently in school, works part-time and has a child. Can I open an Individual Retirement Account (IRA) for her, but maintain control of the funds?
FPA member Vance Lahey, CFP®, says there are some basic guidelines and thoughts you should consider:
- An IRA has some rules regarding eligibility and the amount you can contribute. The maximum contribution for a person under age 50 is $5,000 per year or 100 percent of earned income. You can only save money into an IRA account if the owner earns income during the year of contribution. For example, if your granddaughter makes $4,000 working part time in 2012, then she (or you) can save up to $4,000 in the account that year. If she has no earned income, no contributions can be made to her account. If contributions are made into her account, and her income is below a certain point that year, she may be eligible for what's called a "Saver's Tax Credit", which would give her up to $1,000 credit on her income taxes if she is eligible. Review the IRS' guidelines.
- An IRA can be owned by only one person. So, if it is owned in your granddaughter's name, then she could control the account. You could get your granddaughter's permission to direct the investments in the account and send it to the investment company at which you opened the IRA. This would allow the account to be managed by you (but remember she can make transaction requests as well).
- If you don't want her to have any access or control over the funds, then you could set up a separate IRA account in your name, make contributions and invest prudently. You can name her as the sole beneficiary of the account. There are drawbacks to this strategy because the money passes upon your passing and she may have to take Required Minimum Distributions, even before she is retired and even if she doesn't need the money.
- You can always set up a non-retirement account in your name and invest as you would have in the IRA. This provides you complete control and it would not have any limits on when you gift the money to your granddaughter, during life or at your passing. The IRA has tax deferral properties, so it is better from a tax standpoint, but has some drawbacks resulting from IRA rules and regulations.
“Ideally, I would recommend that you have a conversation with your granddaughter, explaining why you want to help her save for her future,” said Lahey. “If she is on board and willing to keep the funds in her IRA account until she is eligible to touch them in retirement, establish permission from your granddaughter so you can request transactions on the account, and educate her in the process and why saving for her future is so important.
“VERY IMPORTANT: Review the benefits of a Roth IRA versus a Traditional IRA. The Roth IRA contribution is made after taxes have been paid on the money, but at retirement (age 59 1/2 or later), the growth on the investment is income tax free. The IRA contribution receives an income tax deduction today and when withdrawn in retirement, tax is payable on the distributions.
“Please remember, this recommendation does not take into consideration many important factors since complete data has not been gathered, alternatives have not been considered and a financial planning engagement has not been established.”