The rules for opening and contributing to a Roth individual retirement account are pretty straight-forward. You must have taxable compensation, also known as earned income, before you can have a Roth IRA. The IRS doesn't care where the money that you contribute to your Roth IRA comes from, as long as you have enough earned income to justify the contribution. The money to fund your Roth IRA could come as a gift from your parents.
You can only open or contribute to a Roth IRA if you have taxable compensation, which includes salaries, wages, commissions, bonuses, tips, income from self-employment, taxable alimony and other sources. The IRS considers income from interest, dividends or other investments to be unearned income, so it doesn't count toward your Roth IRA contribution.
The maximum Roth IRA contribution is set by Congress and is adjusted from time to time. The most you can contribute to your Roth IRA as of 2012 is $5,000, or $6,000 for people who are at least 50 years old, but the maximum is limited by your earned income. You can't contribute more than you earn. For example, if you spent the year in grad school and earned $4,400 working part-time, the most you could contribute to a Roth IRA would be $4,400. If you earned $7,500 the most you could contribute would be $5,000.
A Roth IRA is by definition an individual account. You can't have a joint IRA with your parent, spouse or child. All of the money in your Roth IRA belongs to you, regardless of how that money arrived in your account. For example, if you are married, file a joint return and have no income, you could still have a Roth IRA provided your spouse earned enough taxable compensation to fund it. The money in your Roth IRA belongs to you, not your spouse, as soon as the contribution is made.
In a tight economy it can be hard for young adults to get started financially. Parents can help out by gifting money to their adult children. Gift tax laws as of 2012 allow each individual to give up to $13,000 to another person, including their adult children, without incurring gift taxes. As long as you have earned income, you can use up to $5,000 of that gifted money to fund your Roth IRA, and use your earnings to pay off your student loan, for living expenses or anything else you want.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.