You may not be a millionaire, but you may have reached a stage in life that makes you think that you have done all you possibly can to have a blissful retirement.
You are fortunate that your retirement planning has accumulated more than you need. Probably you don’t need to rely on IRA or 401(k) plan; your pension and Social Security benefits are enough to sail you through your retirement smoothly.
So, because you don’t need the money held in IRA or 401(k), it gets piled up. But IRS doesn’t want you to keep your money as it is in your retirement accounts. When you turn 70½, the Required Minimum Distribution (RDMs) kicks in. This means you have to withdraw a certain percentage from those tax-advantaged accounts each year, whether you want it or not. The worst part of it all – the percentage increases as you age.
And If you fail to withdraw the RMD, you may need to pay 50% of your Required Minimum Distribution amount each year as a penalty.
However, the issue is taxes. If you wish to gift your money to your child or your loved ones, you have to pay income taxes on what you withdraw, and also pay tax if you let the amount stay in the accounts as it is.
Here is how your IRA or 401(K) can become tax free gift for your loved one.
#1 Gift money after reviewing the gift tax rules
Beginning in 2018, you can gift up to $15,000 (or $30,000 if you’re married) to a person in a year without IRS interfering with your transaction. If you are gifting more than that amount, you need to file a gift tax return. That doesn’t mean that you have to pay a tax on the gift. It means that $15,000 is eligible for lifetime exclusion. This is the amount you can gift away during your lifetime without incurring a gift tax. The total lifetime tax exclusion for gifts is $11.2 million per individual; so, gift tax rules are not much of a concern for most people.
#2 Convert your retirement savings into a life insurance policy
Convert your retirement savings into an income tax-free gift (life insurance) for your spouse, children or grandkids.Here’s how it works:
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- You can withdraw the RMDs from your IRA. Pay the tax applied on distributions. The balance amount, you can use to pay the premiums on a life insurance policy. By doing so, you are turning a 100% taxable investment into 100% tax-free.
- If you gift your IRA or a 401(k) to your loved ones, other than your spouse, they have to take distributions the next year, whether they want it or not. And if they are withdrawing, then they have to pay taxes on the withdrawals. The best part of life insurance is that the beneficiary doesn’t need to pay taxes on the amount they receive. It is a true gift.
#3 Can you gift money from an ira without paying taxes.
Let your children inherit your IRA. While you are alive, you have no tax benefit to gifting an IRA. Rather, consider passing it on as part of your estate plan. If your kids inherit your traditional IRA, you get to avoid the taxes while they benefit from the funds you have saved for years. However, they need to pay income tax on the amount they withdraw. A Roth may be a great way to leave your money to your kids without them paying the tax because you have already paid it.
Tax rules involved in the gifting your retirement money to your family or loved ones can be confusing. If you need more information, call (866) 639-0066 for expert guidance.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He brings over 30 years of diverse experience as a financial advisor. Rick takes great pride in giving honest and very experienced advice. Rick can readily converse with business owners and people looking to take control of their retirement accounts.
rick i was laid off from my position and now have to take MRD’s from my 401k plan since i am over 72. i would like to gift to my son an amount up to the 15,000 gift limit. my question is do i have to pay taxes on the amount i am gifting to my son or does the total amount of 15,000 get paid to him since the check will be made payable to him. also, i assume he won’t have any tax liability since this is a gift like giving him a check for his birthday? is that correct? I am asking if i would save the taxes normally payable if i would take the distribution payable to myself or do i still have to pay taxes on the 15000?
thanks for your help.
FG
Francine! Yes, you have to take the distribution in your name (it is your plan), pay the taxes and then give away the money. OR because you have a 401 k plan, you could take a loan from your plan up to $100,000 and use the money as you wish. The loan will have to be paid back with interest (but you are paying interest to yourself) with a five year payback period. Hope this helps
I’m interested in gifting a house, currently owned by me in a self directed 401K plan, to my only child (40 years old). Can I do this without tax implications?
Hi, Tom! The tax code says you pay taxes on the fair market value of the asset distributed. If you distributed a home owned by your sd 401 k, what is the fair market value? For example, what if you distributed only 20% of the house, your plan still controls 80%. Who would pay 20% of the full price knowing someone else (your plan) still as full use of the property. To utilize this “ripped dollar strategy” we hire a valuation person and the normal discount is around 35%. Bottom line – you should do everything possible to lower the value of the asset, then distribute it to yourself and pay less tax.
I need a new transmission in my car and my car is my only transportation. I am 75 years old and would like to know if I gift a portion of my IRA CD to my Daughter so she can pay for the work to be done, will I be subject to taxes under the gifting clause?
I would appreciate a response,
Thank you.
@Sandy, Sorry for the late reply and thank you for the question. Unfortunately, an IRA is an Individual Retirement Account (it’s yours) and you would have to take a taxable distribution, then give money away.
My mother left me an annuity to be distributed between my siblings. It is in my name only. How can I give them the money without me showing earned income when I withdrawal?
Hi, @Marlene L.
Annuities are tax sheltered savings vehicles. To answer the question properly, I need to know if the annuity is a qualified or non qualified annuity. Qualified means the funds used to purchase the annuity came from a retirement account. Non qualified means the funds came from regular dollars.
If it is a qualified annuity, the annuity owner would have to ask for distribution from the insurance company that sponsored the annuity.This would be a taxable distribution, no way around that.
If it is a non qualified annuity, again the owner would have to ask for a distribution only this time, the original funds would be distributed tax free but any earnings would be taxed.
Hope this helps