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My girlfriend has been saving money to start a Roth IRA. For her birthday, I'd like to surprise her by giving her cash - double what she's saved. It will certainly be under the annual exclusion of $15,000 for 2020. Likely in the range of $500-$1000.

Are there any potential issues arising from this? Does a Roth IRA have to be funded with post-tax money from the account holder's employment - or can it come from another source like this?

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    Does she have earned income? Money is fungible, but if her earned income is zero, she can contribute zero.
    – void_ptr
    Sep 30 '20 at 23:23
  • @void_ptr Yes she does, she works part time (about 20-25 hours) while going to school.
    – brenzo
    Oct 1 '20 at 17:09
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TL;DNR version: Yes, money received as a gift can be contributed to an IRA (whether Traditional or Roth) but to be eligible to contribute to an IRA for any year, the IRA owner must have received compensation (essentially, money earned by the sweat of one's brow) during that year.


The source of the money (e.g. wages, savings, gifts, cashing in US Savings Bonds etc) that is used to fund an IRA is not important: what is necessary is for the OP's girlfriend to have compensation (compensation generally means earnings from working) which is not just what appears on a W-2 form as salary or wages; it can be earnings from self-employment too, as well as commissions on sales, alimony etc (but not earnings from rental property, pensions and annuities, certain types of partnership income etc). The reason is that Roth IRA contributions are limited to the smaller of her compensation and $6000 ($7000 if age 50 or more) for 2020 (and for 2021 too).

Be aware that almost all IRA custodians will accept IRA contributions without enquiring as to whether the IRA owner has earned income or not (or maybe somewhere in the fine print that nobody ever reads before clicking the Submit button it will say something like "By clicking Submit, I am certifying that I have sufficient earned income to support this contribution."). For those who make IRA contributions in excess of what they are entitled to make, the fit will hit the shan (as Dr Spooner was fond of saying) when at the end of the following May, each IRA custodian sends Form 5498 to the IRS (with copy to IRA owner) telling the IRS how much has been contributed to the IRA by that person, and the IRS matches up these numbers with what that the owner's tax return says. This reconciliation catches people who contributed more than they are entitled to contribute, and various undesirable consequences follow.

Note that lowly-compensated folks can contribute their total compensation to their IRA if they choose to do so. But what about the fact that the take-home pay is less than the total compensation because of Social Security and Medicare tax, not to mention income tax withholding? How can people earning less than $6000 contribute all of it to an IRA? Well, that is where savings or earnings from rental property etc can be used to fill in the shortfall between take-home pay and the total compensation amount to be contributed to the Roth IRA.

Note that at the upper end, high-earners are prohibited from contributing to a Roth IRA at all. Also, while high earners can contribute to a Traditional IRA, they cannot deduct their contribution on their tax return. That nondeductible contribution is not taxed when withdrawn but any growth of that money is taxable when withdrawn from the Traditional IRA. See this answer for details.

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    All this is true but the take-home message is a bit buried in there: the girlfriend can contribute up to the lesser of her total earned compensation, or $6000. The amount of money her boyfriend gives her does not change that. Might be good to foreground that more.
    – BrenBarn
    Oct 1 '20 at 4:21
  • @BrenBarn Thanks for the comment. I added a short TL;DNR version at the top. Oct 1 '20 at 19:25
  • Nit: alimony/maintenance is compensation only if it is taxable (and correspondingly deductible to the payor), which is only if the divorce was before 2019 and the decree/agreement not changed more recently. Oct 2 '20 at 5:56

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