In “Funding a 3-Year-Old’s Roth IRA,” I write:

Unlike a 401(k) plan, which requires salary deferrals in order to fund, you or anyone else can fund a Roth IRA with any money. The child can contribute. Parents can contribute. Grandparents can contribute. A random friend can contribute. The only hitch is that you are limited in how much you can contribute up to their earned income or this year’s IRA contribution limit whichever is smaller.

In response to this section, I received the following reader question:

How can someone else contribute to your Roth IRA? I thought contributions to a Roth IRA could only be from earned income.

This is a common confusion with Roth individual retirement accounts (IRAs).

The contribution limit is currently $6,000 or your taxable compensation, which ever is smaller. There is also a special exception called the “Kay Bailey Hutchison Spousal IRA Limit,” which enables IRA owners to use their spouse’s taxable compensation to set their own contribution limit.

If you only had $40,000 of taxable compensation for the relevant tax year, then you can only contribute $6,000, because the contribution limit is smaller. However, if you only earned $12, then you can only contribute $12, because your taxable compensation is smaller.

However, once you have calculated a person’s contribution limit, the dollars contributed to the IRA specifically need not be sourced from the specific dollars earned.

The source of the contribution can be from anywhere – earned income, Vegas winnings, long-term savings, a gift from your mother, spare change you found on the street – so long as what is contributed to the account is below the contribution limit and any gifts to you from others follow gift tax limits/law.

The IRS does not require tracking the source of the precise dollars contributed to an IRA. Neither IRS Publication 590 nor US Code 408(a) has that requirement.

The relevant requirements on your IRA contributions are:

• You must contribute before the tax year’s filing deadline (normally April 15 of the next year).
• Except for rollover contributions, all contributions must be in cash.
• You can only contribute less than your calculated contribution limit, including phase-outs due to a high adjusted gross income.

We suggest you fund your Roth IRA even when you can’t afford it and that you use taxable savings as your seed money. If you don’t open a Roth and contribute at least $1, you may regret it later.

Photo by Alireza Etemadi on Unsplash