Can You Contribute to Someone Else’s 401(k)?

No, but IRAs are another story

Investing in a 401(k) plan at work offers a tax-advantaged path to building wealth. Collectively, American workers held $6.3 trillion in their 401(k) plans as of the third quarter of 2022. Contributions to traditional 401(k) plans are tax-deductible and grow 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 made and how much you can save each year.

Key Takeaways

  • A 401(k) plan is a defined contribution plan that’s funded through elective salary deferrals and employer matching contributions if offered.
  • Employer-sponsored 401(k) plans belong to the employee in whose name they’re established, and only the employee and their employer can make contributions to them.
  • However, it's possible to save for retirement on someone else’s behalf using a spousal IRA, which is 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 in order to max out annual contribution limits.

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 part of their wages to their individual accounts. In terms of how a 401(k) can be funded, there are two types of contributions allowed: elective-deferral contributions taken from the employee’s salary and employer matching 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 own 401(k) plan, the IRS sets annual limits on contributions. For 2022, the maximum 401(k) contribution allowed is $20,500, unless you’re age 50 or older. In that case, you can make an additional catch-up contribution of $6,500. Foe 2023, you can contribute up to $22,500, plus $7,500 if you are age 50 or older.

A common employer matching contribution is 50 cents for every dollar up to the first 6% of earnings. Employers may offer a higher or lower match, but they are not obligated to match contributions at all.

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

But You Can Contribute to Someone Else’s IRA

While you cannot make contributions to someone else’s 401(k) on their behalf or have someone else 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.

Funding a Spousal IRA

A spousal IRA is established on behalf of a non-employed spouse. The spouse who has earned income can make the contributions, but the account itself belongs to the person whose name is on it.

For example, say 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 you set up for yourself. For 2022, the limit is $6,000 for traditional and Roth IRAs, with an additional $1,000 catch-up contribution allowed if you’re 50 or older. For 2023, the limit rises to $6,500, and the catch-up contribution remains the same. In the case of traditional spousal IRA contributions, the amount that can be deducted 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 spouse with greater compensation
  • Any designated nondeductible contribution for the year made on behalf of the spouse with greater compensation
  • Contributions to a Roth IRA on behalf of the spouse with greater compensation

You can fund a spousal IRA while also making contributions to your own IRA for the year.

Funding a Custodial IRA

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

Custodial IRA limits are the lesser of the annual contribution limit or your child’s earnings for the year. Thus, if the yearly limit (as of 2022) is $6,000 but your child only makes $3,000, then the maximum contribution allowed to their custodial IRA is $3,000.

Opening a custodial IRA for your child could be a smart move if you’d like to give them a head start on retirement savings. Keep in mind that once the account becomes theirs, they’d be subject to the same tax rules that apply to all other IRAs. Taking money out before age 59½, for instance, 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 in 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 is established and matching contributions from their employer.

Can I Gift My 401(k) to My Child?

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

If the child is still a minor, your plan might not let you name them as the beneficiary. In that case, you could still gift them 401(k) money by withdrawing it, but this could trigger 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 established a spousal IRA or custodial IRA. The former can be set up on behalf of a nonworking spouse. The latter is designed to allow parents to save for a child's retirement on their behalf if the child has earned 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 have them make contributions to yours, it is possible to fund an IRA for someone else. When making contributions to an IRA, whether spousal or custodial, it’s important to understand the applicable tax rules and contribution limits to avoid running afoul of the IRS. Also, consider whether saving on behalf of someone else makes sense if it potentially means shortchanging your own 401(k) contributions.

Article Sources
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