Dear Liz: I am a 20-year-old college student with a stable, part-time job. I haven’t contributed to a 401(k) with this company because I don’t plan to be working for it for two years, which is how long I’d have to wait for my contributions and earnings to be 100% mine. I’d like to open a Roth IRA, but I’m not sure I’m eligible. I’m listed as a dependent and our household adjusted gross income is between $145,000 and $155,000. Can I open a Roth?
Answer: The short answer is yes, although you may want to reconsider contributing to your workplace 401(k) as well.
As long as you have earned income that’s less than the Roth limits, you can contribute to a Roth account, said Mark Luscombe, principal analyst for tax research firm CCH Inc. Your status as a dependent and your parents’ household income aren’t factors.
This fact allows many wealthier parents who make too much for their own Roth IRAs — the limits are $179,000 for a married couple filing jointly and $122,000 for singles — to give money to their lower-earning children to fund the kids’ Roth accounts.
“The dependent would need to have earned income for the year at least equal to or greater than the amount of the Roth IRA contribution,” Luscombe said. But “the Roth IRA contribution would not have to come from that earned income.” The money could come from the parents’ gift.
All that said, you should reconsider your aversion to your company’s 401(k), especially since you may be misunderstanding how it works. You typically would be able to leave with your own contributions, and the earnings on those contributions, at any time. What you may not be able to take with you is your employer’s full match, since it may take several years for you to be fully vested. Still, you may be able to leave with part of the match, which would make it free money that you shouldn’t turn down.