Carrie Schwab Pomerantz
(SET ITAL) Dear Carrie: Can my wife and I gift part of an IRA to family members without tax to us? Our kids are grown and married. We are age 70. -- A Reader (END ITAL)

Dear Reader: If you've contributed for years to a tax-advantaged IRA and now don't need it to fund your own retirement, it would seem to make sense to give part of it to a family member. And, of course, you can. However, the taxes you pay depend on the type of IRA you have.

You don't say whether you have a traditional or a Roth IRA, and the tax rules for each are very different. 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. However, because contributions to a traditional IRA are made with pre-tax dollars, in spite of your generous desires, the IRS still wants its share. So if you have a traditional IRA, the short answer is no, you can't avoid paying income taxes on a withdrawal by making it a personal gift.

To put it in a more positive light, traditional IRAs are designed to encourage people to prepare for retirement by giving them a tax incentive to save during their working years, when they might be in a higher tax bracket. For them, withdrawals during retirement years would be taxed at a lower rate.

And that may very well be the case for most folks. However, whether you use the money for yourself or give it to someone else, it's considered ordinary income, and you have to pay taxes at whatever your tax rate is the year you make the withdrawal.

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.


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 gift tax-free. 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.

Carrie Schwab Pomerantz

Carrie Schwab Pomerantz is a Motley Fool contributor.

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