May 9, 2019

Edited 05/19/20

Worried About Your Parents’ Retirement?

One question we hear often is “How can I help my parents plan for retirement?” While there are many different paths to do this — and it can be as simple as just listening to their concerns — we have been asked multiple times whether you can contribute directly to your parents’ retirement accounts.

While not everyone may be in a position to contribute to their parents’ retirement, for those that are considering it, there are several important considerations.

Will Your Financial Institution Allow It?

While the IRS does allow contributions directly by you to your parents’ IRA, not all financial institutions will allow you to do it.  

How Much Can Be Contributed to Your Parents’ Retirement Account?

Assuming your financial institution allows it, the next question is whether your parents are eligible to make contributions to their individual retirement accounts (IRAs). To contribute to an IRA, an individual must have “earned income” (which is just an IRS term for your wages, salary or earnings from self-employment) that is equal to or greater than the contribution amount.

The IRS additionally sets annual limits on how much you can contribute to an IRA. For 2020, the contribution limit for someone over 50 is $7,000. This means that if your parents are over 50, they (or you) could contribute up to $7,000 to each of their IRAs assuming they have earned income equal to that amount.

Another common question is what happens if one parent has enough earned income but the other does not?  Luckily the IRS allows a “spousal IRA” which permits a contribution to the IRA of the non-earning spouse so long as the other spouse’s earnings are equal to the combined contribution amount.

What Type of Account Should I Contribute To?

Next you need to decide whether to contribute to a Traditional IRA or a Roth IRA account. Each account has different tax treatments that you should consider.  

Traditional IRAs

If you contribute to a Traditional IRA, your contributions can be fully tax-deductible for your parents (but not for you). If your parents are still working and participating in employer sponsored retirement plans (for example, a 401(k) plan) this tax deduction is phased out above certain income levels. Check here for the 202o limits.

Roth IRA

While there is no upfront tax deductibility and no restriction if your parents are participating in an employer plan, there are income limits that determine Roth IRA eligibility.  For 2020, the limits are $124,000 -$139,000 if a single filer and $196,000 – $206,000 if filing jointly. Check here to see more information on the 2020 limits.

Different Tax Treatment

While Traditional IRA contributions are tax-deductible, withdrawals in retirement are taxed at ordinary income tax rates. Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free.

Finally, you should be aware that the IRS will impose a penalty on any excess contributions over the annual limits discussed above. This means that you should find out if your parents already made contributions to an IRA or a Roth IRA this year. While your parents may appreciate your desire to help their retirement, they may not appreciate it if you cause them to owe a tax penalty!

At the end of the day, the fact that you want to support your parents as they approach retirement is the most important thing. And, as you discuss retirement with them, take the time to listen to your parents’ experiences as they planned for retirement. Learn from their successes and their mistakes so you can make sure that you stay on the right track as well.