Can you contribute to someone else’s 401(k)?

Investing in a 401(k) plan in your workplace offers a tax-advantaged path to building wealth. Collectively, American workers held $7.7 trillion in their 401(k) plans as of the fourth quarter of 2021. Contributions to traditional 401(k) plans are tax deductable and increase tax-deferred until you’re ready to retire. If you have access to a 401(k) at work, it’s important to understand how contributions can be paid and how much you can save each year.

Key points

  • A 401(k) plan is a defined contribution plan that is funded through elective salary deferrals and matching employer contributions, if offered.
  • Employer-sponsored 401(k) plans belong to the employee in whose name they are established, and only the employee and his or her employer can contribute to them.
  • However, it is possible to save for retirement on behalf of someone else by using a spousal IRA, designed for married couples with earned income.
  • When making 401(k) contributions, it’s important to consider how much of your salary you’re able to defer to meet the maximum annual contribution limit.

Who can contribute to a 401(k)?

According to the Internal Revenue Service (IRS), a 401(k) is a qualified profit-sharing plan that allows employees to contribute a portion of their salary to their individual accounts. In terms of how to fund a 401(k), two types of contributions are allowed: elective deferred contributions taken from the employee’s salary and matching employer contributions.

Nowhere does the IRS mention contributions made by anyone other than the employee and employer. This means that you cannot make direct contributions to someone else’s 401(k) plan on their behalf.

In terms of how much you can contribute to your 401(k) plan, the IRS sets annual limits on contributions. For 2022, the maximum contribution allowed for a 401(k) is $20,500, unless you are 50 or older. If so, you can make an additional $6,500 recovery contribution. Foe 2023, you can contribute up to $22,500, plus $7,500 if you’re 50 or older.

A common employer-matched contribution is 50 cents to every dollar up to the top 6 percent of earnings. Employers may offer a higher or lower match, but are under no obligation to pay contributions.

Before employer contributions to a 401(k) can be considered fully yours, they must have accrued, which can take anywhere from three to six years.

But you can contribute to someone else’s IRA

While you can’t contribute to someone else’s 401(k) on their behalf or ask someone else to contribute to your 401(k), it is possible to fund an individual retirement account (IRA) that doesn’t belong to you. There are two ways to save in an IRA for another person: a spousal IRA and a custodial IRA. Here’s a closer look at how each one works.

Financing a spousal IRA

A spousal IRA is set up on behalf of an unemployed spouse. The spouse who received income can pay contributions, but the account itself belongs to the person in whose name it is.

For example, suppose you work full-time and your spouse is a stay-at-home parent. You could open a spousal IRA in their name and then make regular contributions to it each month. Once you both reach retirement age, the money in the IRA would be theirs to withdraw.

The contribution limits for spousal IRAs are the same as the limits for an IRA that you set for yourself. For 2022, the limit is $6,000 for traditional and Roth IRAs, with an additional $1,000 recovery contribution allowed if you’re age 50 or older. For 2023, the limit rises to $6,500 and the recovery fee remains the same. In the case of traditional spouses’ IRA contributions, the deductible amount is the lesser of the annual contribution limit or the total compensation of both spouses for the year, reduced by:

  • The IRA deduction for the year of the higher-paying spouse
  • Any non-deductible contribution designated for the year paid on behalf of the spouse increased
  • Contributions to Roth IRA on behalf of higher-paying spouse

You can fund a spousal IRA while also contributing to your IRA for the year.

Financing a custodial IRA

A custodial IRA is opened by a parent on behalf of a child who has earned income. For example, if your child starts their own small business or gets a part-time job after school, they may be eligible for a custodial IRA. As a parent, you would act as the custodian of the account until your child reaches the age of majority in your state, typically between the ages of 18 and 21.

Custody IRA limits are the lesser of the annual contribution limit or your child’s earnings for the year. So, if the annual limit (as of 2022) is $6,000 but your child earns only $3,000, the maximum allowable contribution to their custodial IRA is $3,000.

Opening a custodial IRA for your child could be a smart move if you want to give them a head start on retirement savings. Keep in mind that once the account becomes theirs, they would be subject to the same tax rules that apply to all other IRAs. Withdrawing money before the age of 59.5, for example, could result in a 10% early withdrawal penalty, unless an exception applies.

If you have an IRA, you may be able to open a custodial IRA with the same brokerage.

Can you put money into someone else’s 401(k)?

No. A 401(k) plan can only be funded through elective salary deferrals made by the employee in whose name the account was opened and matching contributions from their employer.

Can I gift my 401(k) to my child?

If you want to leave your 401(k) with your child and you’re divorced or unmarried (i.e., don’t have a spouse), you can simply name them as a beneficiary in your account. If you have a spouse, however, they are automatically entitled to everything in the account, regardless of who is named as a beneficiary of the plan. Your spouse would need to make a written waiver to allow your child to inherit the 401(k).

If the child is still a minor, your plan may not allow you to name him or her as a beneficiary. If so, you could still give them 401(k) money by withdrawing it, but that could result in tax penalties.

Can someone make a contribution to someone else’s IRA?

It’s possible to make contributions to someone else’s IRA if you’ve set up a spousal IRA or a custodial IRA. The former can be established on behalf of a non-working spouse. The latter is designed to allow parents to save for a child’s retirement on their behalf if the child has earned an income. Both are subject to annual contribution limits and the same tax rules that apply to other IRAs.

The bottom line

A 401(k) plan can be an important part of your retirement savings strategy. While you can’t contribute to someone else’s 401(k) or ask them to contribute to yours, it is possible to fund an IRA for someone else. When making contributions to an IRA, whether spousal or custodial, it is important to understand the applicable tax rules and contribution limits to avoid conflict with the IRS. Also, consider whether saving on behalf of someone else makes sense if it potentially means reducing your 401(k) contributions.

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