Can my wife and I give part of an IRA to family members without tax to us? Our kids are grown and married. We are age 70.
You may be willing to share your IRA with your family, but in spite of your feelings of generosity, Uncle Sam still wants his share. However, the taxes you pay depend on the type of IRA you have—a traditional or a Roth.
With a Roth, contributions are made with after-tax dollars (the government gets its share upfront) and withdrawals (regardless of what you do with the proceeds, including making a gift) are tax-free. But because you make contributions to a traditional IRA with pre-tax dollars, you still have to pay income taxes on a withdrawal even if it’s a personal gift.
That doesn’t mean you can’t be generous. It just means that you have to look at any gifts you make within the context of your bigger tax picture. Because income taxes aren’t the only type of taxes you need to think about. You also need to be aware of how much you can give without having to worry about gift taxes.
In 2014, an individual can give up to $14,000 a year to any number of people without paying gift taxes, or even reporting the gifts. However, as soon as you give more than $14,000 to any one individual, you have to file a gift tax return. That doesn’t mean that you’ll have to pay taxes on the gift. It just means that the amount above $14,000 will be applied to what’s called your lifetime exclusion. This is the total amount you can give away during your lifetime beyond the yearly limit without incurring a gift tax. For 2014, the exclusion is $5.34 million, so gift taxes aren’t a concern for most people.
Married couples can give up to $28,000 a year to any number of individuals if they agree to what’s called “gift splitting.” They do have to file a gift tax return, but it won’t count against their lifetime exclusions. For instance, you and your wife could give $28,000 a year to each of your children, their spouses, and any grandchildren without it even counting against your exclusion.
If you don’t want to take the income tax hit on an IRA withdrawal, there are other tax-smart ways to give. For instance:
- Give an asset that has a high probability of future appreciation, such as a growth stock or real estate. You’d reduce your estate’s value by the value of the gift, and avoid future appreciation that might raise your tax bill.
- Give income-producing property to someone in a lower income tax bracket. You’d again reduce your taxable estate, and the recipient would likely pay less in taxes than you would.
- Give proceeds from the sale of assets that have gone down in value. This way you could take the capital loss, possibly lowering your tax bill.
You can always just let your kids inherit your IRA. If yours is a traditional IRA, they’ll get the money and you’ll avoid the taxes. However, your kids would pay income taxes on withdrawals at their own tax rate. A Roth, on the other hand, is a great way to leave money to your heirs tax-free.
Ultimately, this is all part of your estate plan. So rather than just focusing on your IRA, take a step back to make sure all your giving decisions are working together. Talk to your tax advisor and discuss the pros and cons of various scenarios. Be sure to include any charitable contributions in your discussion.
Then talk to your kids. Whatever you decide to give them, they’ll value your open and honest communication—as well as your generosity.
This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where such advice is necessary or appropriate, please consult a qualified attorney, tax advisor, CPA, or investment manager.
COPYRIGHT 2014 CHARLES SCHWAB & CO., INC. MEMBER SIPC. (0314-1789)