­Using Gifts and Roth IRAs to Achieve Major Tax Savings

Here is the scenario:

Matt is 17 years old and earns $6,000 during 2018 in wages from summer and after-school jobs.  With the earned income, Matt can qualify to contribute up to $5,500 to a Roth IRA (this is the maximum per year for anyone under age 55).  Matt, or anyone else, can make the Roth contribution on Matt’s behalf.  Matt’s grandmother decides to make a gift to Matt of $5,500 (this is tax free to Matt and not tax deductible by the grandmother).  The $5,500 is then contributed to a Roth IRA for Matt.

Here are the benefits:

  • All distributions made to Matt once he turns age 59 ½ are tax free.
  • Any contributions made to the Roth can be withdrawn at any time with no tax bill
  • All earnings grow tax fee when invested inside of the Roth IRA
  • $10,000 can be withdrawn tax free to assist with the purchase of Matt’s first home

A possibility:

If Matt invests the $5,500 in his Roth IRA, never contributes any other funds and he earns 7% annual interest, Matt’s $5,500 contribution will be worth $103,152 when he takes distributions at age 59 (if he chooses to do so).


See IRS Publication 590-A and 590-B for more information.