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:
- 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.
Need Help with Gifting your 401(k)/ IRA?
Tax rules involved in 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 company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.
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.
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
my ira has grown considerably and i do not want to take out such a huge rmd, can i donate to my daughter, grandkids my daughters ira example My IRA to her IRA and set up a 529 to transfer to my grandkids from my IRA or an HSA for my daughter who has no medical insurance.
I believe an aswer to this question is better answered by a tax professional
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,
@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
Hi Mr. Pendykoski,
Please advise if my understanding of this is correct:
1) I am planning to withdraw $50,000, from my 401k account. I will then owe taxes on this withdrawal, which is to be expected.
2) I plan to gift the $50,000 to my son. He will not have a tax liability, since recipients of gifts are not taxed.
3) When I file my taxes next year, I am required to file Form 709.
4) And this is the key question: I will not have to pay any additional taxes on the $50k, since those funds were already taxed once? (because of my 401k withdrawal)
5) I understand the answer is anyway ‘no’ (regardless of the source of the $50k) based on your explanation:
“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”
Thank you for your help!
Hi, Robin! This is a tax advice, so I wont be able to answer this for you.
Will I be taxed If I give a gift of $20,000 to my son to buy a house for himself.
You can loan the $20k to your son or gift him the legal amount which is 16k for 2022
I am over 75 yrs old and I want to gift a portion of my 401K to one of my children ($140k). What are my tax implications and what are the tax implications for my child
Hi, Darren N! This is a tax advice, so I wont be able to answer this for you.
Both of my parents take RMD from their IRAs, one has a private pension the other was a teacher and has a public pension so she does not get social security. What would be the best tax strategy for them? Gifting money from their retirement savings (thank you for the advice on not gifting IRAs let kids inherit), take out a home equity line out on their main home which is paid for to buy a vacation home or buy another house (retirement villa)? It seems mortgage interest continues to be a good strategy??? Or am I wrong?
Once again this is a question for a CFP or CPA to answer. There are too many variables for me to offer an idea – one question not included in your inquiry is “what is the end game” your parents are looking at.
If my mother in law wants to take money out of her 401k and have it directly distributed to her son as a gift, is there a way to do it without the gift coming directly through her? Can it go from 401k to him without passing through her checking account? She is afraid she may lose her Medi Cal health insurance if she withdraws money and they see it as an available, spendable asset.
Hi Krys, It is a legal and accounting question. Generally, if some one is 70 or older they can gift directly from an ira to a CHARITY.
I am getting $38,000.00 from retirement pension from my union I worked at. Money will be taxed at 40%
How can I gift my wife $15,000.00 and son $15,000.00 without paying the 40% taxes on it
Hi F W Martin, Why is the money being taxed at such a high rate? It seems very high. Distributions other than Roth will incur income tax – find out where they get the 40% from.
Wow this is super helpful. Rick, I am going through a divorce and want to give my soon to be ex-wife my 401k to make sure she has a retirement account. Can I gift it to her to avoid paying taxes or penalty fees?
Hi John, This is a legal question but our clients going through this, they have a court issue a QRDO – a qualified domestic relations order.
I have some stock in my Ira that I would like to gift to my great nieces. Will I be required to sell the stock and use the proceeds to buy stock in their name or how do I get it out of my Ira?
This question is best answered by a CPA
I have been happy with the way the stock market has been performing and the funds in my IRA accounts have been steadily increasing. Even though my portfolio is conservative, I am wondering if there is another avenue to protecting the monies in those accounts?
This is a question for a CFP or an Investment advisor to answer. Having said that you might want to look at the alternative world which has investments non-corelated to market fluctuations. Eg Real Estate, tax liens, lending money – this is exactly what we do every day here, put people in a position to broaden their investment portfolio with choices not dependent upon the market.
Can I gift my traditional IRA to my wife without getting distribution while I am alive? I am 67 and she is 65.
No, the only way to get funds is to take a distribution.
Can I gift my children my inherited annual RMD (less than 15k) from my father’s estate to the grandchildren’s inherited IRA trust account?
This is a question for a tax professional
My grandma passed away and my mom is the exec. on the estate. She has a 401k. There is just three people in the will, how do we go about dispersing the 401k to everyone? Can we gift portions to everyone to put in they’re own IRA’s? Cash out?
Probably in the 401 K documents, there was a spot to name the beneficiaries. I think it would depend on who the beneficiaries are – is it the same three people for example. If not, then the beneficiary (s) have to decide what to do.
I am age 45 and am in the process of liquidating an inherited IRA to fulfill my father’s will. Does it make sense to donate portions of the IRA directly to the nonprofits on his list or would I be just as well withdrawing it into my own name, writing the checks from my own account and then writing off the deductions?
Hi David, This is a legal and accounting question and would be best answered by your tax professional. If it were me, I would abide by the will
If I receive a gift from my spouse’s IRA, is it taxable income for me as the recipient?
I don’t know how you can get a direct gift from another person’s ira – I have never heard of that. Your wife would have to take a taxable distribution.
Is a cash gift with money withdrawn from an IRA taxed twice – once for the withdrawal and another as a gift tax? Assume the gift is above the $15,000 exclusion amount. Thanks for responding.
Hi Peter, this is a question for your tax professional. There are two gift guidelines, one annually and one lifetime.
Rick – I have researched this and found several articles that indicate I can gift up to $15000 without this being additional income. I gifted two times, once to my wife for $15000 and then my daughter for $5000, out of my 401k. I paid taxes on both withdrawals. Since my total distributions was $26800 and I gifted $20000, is the $6800 counted as income even though $5360 of this was taxes?
This is a question for your tax professional. You are correct about the $15k annual gift limit. If you took a $26,800 distribution and paid the taxes, then you could do anything you wished with the money. If I read your question correctly, you used part of the distribution to pay the taxes but it was part of the $26,800 and the whole distribution would have been a taxable event.
can i cash out a 403 b to make a gift to my sibling in the amount of 50k, Im 65 still employed. or should I cash out my Roth which I have in the same amount? How can this be tax free as gift to the recipient of the gift?
Hi Blanca, you can certainly cash out a 403 b and pay the income tax. The question of the $50k becomes the question – I believe it is over the annual gift limit.
I want to take out $50,000 from my 401K. I am turning 69 and have never taken any out. After clearing taxes I would theoretically have about $35000 left. Can I gift $10,000 each to my two children without any additional tax implications for them.
Hi Ricky, If you take a distribution and pay the appropriate taxes, you can do anything you wish with the money and I believe $10,000 is under the annual taxable gift amount.
If my kids open an Ira, can I rollover a gift amount to it without paying taxes? And can I do it every year or is it a one time thing?
Hi David, This is more of an accounting and tax question.
If my parents want to pay my son’s college tuition out of their 401k will they be taxed on the withdrawl?
I purchased a condo and my parents will be living in it. It needs substantial updates. Can I gift my parents part of my 401k so they can withdraw and pay for renovations?
You would have to take a taxable distribution then gift your parents the money. The gifted amount is not taxable to them.
I inherited a ira when my mother passed. What is the tax rate when withdrawing money?And then Do I have to claim that as income and get taxed again? And can i gift money to anyone? thank you
If you take a distribution from an IRA (inherited or not) the distribution will probably be taxed as regular income. Once you do take a distribution, then you can gift up to the annual limit of $16k.
Can you take money out of a 457(b) (after you’re retired and met the requirements) and give it as a gift without having to pay income tax on the money?
A common question, but the IRS treats distributions as taxable income.
hello is there anyway i can give my wife my 401k.. i have about 71k in there now.. i am 32 years old, how much of a penalty and taxes would i have to pay?
I don’t think there is a way to gift your 401 k. It is a qualified pension plan in your name.
Hello Rick. I am 61 yrs old and now just working p/t. My sister is 72 and has a retirement plan from the company she worked for. She gets a monthly allocation, an amount she chose, every month. She now wants to gift me 10 or 12k per year. Question, can she gift me that amount after advising her retirement administrator, without paying taxes on it as income. My research shows she can do that as the max non-reportable gift amt is 15k per year. If she just increases her allocation every month, she pays to give me the extra money (non-gift), she would then pay taxes on it, correct?
You are a lucky person – the annual amount she can gift you is 16k per year. I believe the allocation she takes will be taxable, the gift to should not be
If I take 20,000 out of my IRA (5,000.00 for taxes) and gift 15,000 to my daughter, does this put me into a higher income bracket as far as the percentage of taxes that I pay? I am right at 22%, but would go up to 24% if this gets added to my income. Also, it would kick in IRMAA for my Medicare payments. Thanks for your help Rick!
Not sure about IRMAA but the distribution of 20 k might propel you into a higher tax bracket
Hello and thank you for your help.
I would like to gift my husband 8,000 from my 401k. I will pay the taxes and so the gift will 6400. Would that be considered taxable income because we file jointly?
It should be considered taxable income to you and therefor to your joint filing
I am planning to retire 2022 december. I would love to gift money to my kids. Covid has them jobless and they have children. Can I gift them 15,000 per year or just one time. I amazing single mother. I have a 401k and 403b.
Yes, you can gift every year, not just once but you first will have to take a taxable distribution to get the money to gift.
Can I gift over a 401K (about $243K) to a friend without it being a taxable event? Or do I have to pay the taxes on it? Thank you.
No you should not gift it but you can lend it if the friend is not a disqualified person.
My brother passed away leaving approximately $500K equally between his daughter and me, his sister in IRA accounts. The inheritance will be divided equally. Can any of this money be gifted so that we don’t have to pay income tax? We live is SC.
You will have an inherited IRA and the IRA rules apply – meaning you the only way to take money out is a taxable distribution.
Hi Rick, If my mother wants to gift me $15,000 out of her 401k. Does that count as earned income for me come tax time? Thank you!
Yes it would be a taxable distribution
My Annuity has matured and I need to roll into something safe. I want to take $20,000 ($2000.00) withholding for taxes to gift $9,000.00 to each of my grandchildren. I am not turning 70 until the end of 2022. Am I doing the right thing?
Technically you are doing the right thing