Sometimes, situations arise where a family member, friend or charity needs cash and the question arises can I use my IRA to gift someone money? This article will go over the IRS rules for gifting from retirement accounts.

IRA Accounts

An Individual Retirement Account (IRA) is a powerful tool to help you save for retirement, while enjoying tax benefits. There are several types of IRAs, each with its own rules and advantages. Traditional IRAs allow for tax-deductible contributions; you can reduce your taxable income in the year you contribute. However, withdrawals in retirement are taxed as ordinary income. On the other hand, Roth IRAs offer tax-free withdrawals in retirement if certain conditions are met, but contributions are made with after-tax dollars, meaning there is no immediate tax break.

Other types of IRAs are SIMPLE IRAs and SEP IRAs, used by small business owners and self-employed individuals. These accounts have higher contribution limits and can be a great way to boost retirement savings. Understanding the specific rules, such as contribution limits and withdrawal rules, is key to maximizing the tax benefits of your retirement account(s).

What Can I Do with an IRA?

Other than the regular investments you can’t make with an IRA, like life insurance and collectibles, the Internal Revenue Code (IRC) prohibits any transactions with a disqualified person.

A “disqualified person” (IRC Section 4975(e)(2)) includes a wide range of related party situations but generally includes the IRA owner, any ancestors or lineal descendants of such and entities in which the IRA owner has a controlling equity or management interest.

Therefore, an IRA owner cannot do any transaction with a disqualified person, including a gift. But what about an IRA owner gifting to a charity or non-disqualified person? In that case, you must coordinate with the IRA administrator to ensure proper handling and compliance with IRS rules.

Gift an IRA to an individual

Can one lend IRA funds to a friend (or other disqualified person) and never receive payment back? Technically yes, but the borrower would have to take into account the amount of the cancellation of debt. Thus, the IRA loan that was not paid back would turn into income for the borrower under IRC Section 108 – cancellation of indebtedness rules.

Related: Using a Gift to Fund an IRA

Gifting an IRA to a Charity as a Qualified Charitable Distribution

Before we get started, note that IRS rules do not allow you to use your IRA to make a gift to a charity before the age of 70 1⁄2.

Prior to 2023, the IRC allowed a taxpayer to exclude from gross income up to $100,000 per taxable year of certain distributions from IRAs made directly to charitable organizations. The exclusion is only available if the IRA owner is at least 70 1⁄2 at the time of the distribution and any exclusion must otherwise qualify as a charitable deduction under the Code. Distributions to private operating foundations are allowed, but not distributions to donor advised funds, supporting organizations or other private foundations.

Beginning in 2023, as a result of SECURE Act 2.0 which is part of the $1.7 trillion-dollar omnibus spending bill signed into law by President Biden in December 2022, the $100,000 limit will now be indexed for inflation. An IRA gift transfer, known as qualified charitable distributions (QCDs) offers eligible older Americans a way to give to charity. This includes Roth IRAs, although it would not make much sense to make such distributions from a Roth since qualified withdrawals are tax free. In addition, for IRA owners who are 73 or older, QCDs will count towards the IRA owner’s required minimum distribution (RMD) for the year.

Since an IRA is tax free, the amount sent to the charity as part of the QCD is not taxable, but not tax deductible.

How Does it Work?

Any IRA owner who wants to make a QCD during the taxable year should contact his/her IRA custodian before December 31. It’s recommended to start the process a few months prior so the custodian will have time to complete the transaction before the end of the year. Usually a distribution from a pretax IRA is taxable when received. With a QCD, these distributions are tax free as long as they’re paid directly from the IRA to an eligible charitable organization.

QCDs can be made electronically, directly to the charity, or by check payable to the charity. Remember that an IRA distribution, such as a wire transfer, made directly to the IRA owner is not a QCD. A check made payable to the IRA owner is not a QCD. The IRA funds must go directly from the IRA custodian to the charity.

Each year an IRA owner, age 70 1⁄2 or over, can exclude from gross income up to $100,000 of these QCDs. For IRA owners over 73, the QCD can satisfy the RMD for that year up to $100,000 (indexed for inflation).

For a married couple, if both spouses are age 70 1⁄2 or over and both have IRAs, each spouse can exclude up to $100,000 for a total of up to $200,000 per year. But the QCD is available regardless of whether or not an eligible IRA owner itemizes deductions on their tax return.

The amount of IRA funds transferred to the qualified charity is not taxable, although no deduction is available for the transfer since an IRA is tax-exempt.

IRA Gift to a Split Interest Entity and its Tax Benefits

A split-interest agreement is created when a donor contributes assets directly to a nonprofit organization or places them in a trust for the benefit of the nonprofit organization but for which the organization is not the sole beneficiary.

A split-interest agreement can also be used to create a life income gift such as a charitable gift annuity or a charitable remainder trust which provides income to the donor while benefiting the charity. New for 2023, SECURE Act 2.0 allows for a QCD to allow for a one-time distribution from an IRA to a “split-interest entity,” such as a charitable gift annuity (CGA) or a charitable remainder trust (CRT). The total amount may not exceed $50,000.

This appears to be a one-time deal. In other words, you can’t make multiple payments over a number of years to get to $50,000. Based on the language in the Act, a split-interest entity means a charitable remainder annuity trust, a charitable remainder unitrust, and a charitable gift annuity, provided that the receiving entity is funded exclusively by qualified charitable distributions.

In the case of a charitable gift annuity, a contract is created between a donor and a charity with the following terms: The donor makes a gift to charity using cash, securities or possibly other assets. In return, the donor becomes eligible to take a partial tax deduction for the donation, plus receive a fixed stream of income from the charity for the rest of his or her life.

In the case of an IRA, the benefit of using IRA funds to fund a CGA is somewhat limited. For example, if an IRA owner makes a one-time distribution of $50,000 to a CGA from a traditional IRA and at death is liquidated and reinvested and pays out $90,000 over the individual beneficiary’s lifetime, the first $50,000 of distributions would be subject to ordinary income from the IRA. Hence, using an IRA to fund a CGA does not offer much tax benefit; the IRA owner would likely be better off just making a distribution directly to a charity if their ultimate goal is to benefit the charity.

Tax Implications of Gifting an IRA

Gifting an IRA can have significant tax implications that need to be considered. When you withdraw funds from an IRA to gift to someone else, the amount withdrawn is treated as taxable income. This means you will owe income taxes on the distribution, and if you are under 59½ you may also incur a 10% early withdrawal penalty.

The recipient of the gifted funds can’t simply add them to their existing IRA. Instead, they must manage the funds in a new account which could have its own tax implications. You need to understand these costs and plan accordingly to avoid unexpected tax burdens.

Annual Exclusion and Gift Tax

The annual exclusion is a key concept in gift tax. For 2022 you can give up to $16,000 per recipient without incurring gift tax. If you go over this amount you may be subject to gift tax which can be a big deal. But using your IRA funds to make a QCD can help you avoid both gift tax and income tax.

A QCD allows you to transfer up to $100,000 directly from your IRA to a qualified charitable organization, bypassing the need to pay income tax on the distribution. This supports charitable causes and is a tax efficient way to manage your retirement savings.

Tax Return and Reporting Requirements

When you gift an IRA it’s important to be aware of the tax return and reporting requirements. For instance, if you make a QCD, you will need to file Form 1099-R with the IRS. This form reports the distribution and ensures it’s accounted for in your tax return.

You may also need to file Form 8606 to report the distribution and taxes owed. Given the complexity of these requirements, it’s highly recommended you consult with a tax professional. They can help you ensure you comply with all federal tax laws and maximize the tax benefits of your retirement accounts.

Conclusion

If you’re under 70½ you can’t use IRA funds to gift to a charity.  But if you’re 70½ or over you can distribute up to $100,000 now indexed for inflation to a charity tax free. And if you’re 73 or over, the amount of the QCD can be used to offset the amount of any RMD owed. The new one-time $50,000 distribution rule for a split interest entity will likely have limited impact on most IRA owners.

And while you can technically gift an IRA to an individual, he or she can’t be a disqualified person and would be subject to the cancellation of indebtedness rules. Under certain circumstances, this may be an option for some people.

Frequently Asked Questions