Individual retirement accounts were created to encourage workers to build nest eggs that are able to grow quickly because of their tax-deferred status. Ideally, assets in an IRA are destined to help fund an investor’s retirement. The tax benefit extended to these assets isn’t meant to be used for other purposes. Because of this, there’s no streamlined method to gift assets to another person directly from your IRA account.
Consider assets you own as part of an IRA as existing in a sort of financial limbo: You own them and can access them penalty free in your golden years, but until then you’re not meant to be dealing those assets or gifting them to another. Even when you reach retirement age, the brokerage that administers your IRA may require you to maintain assets under the umbrella of your IRA plan and may only allow you to liquidate them rather than transfer them directly.
Transferring IRA Assets
Although investors have heard rumors of changes to the tax code to allow them to gift assets directly from their IRAs for years, the option still isn’t available. Because of this, the most practical way to gift a stock held within an IRA is to liquidate the stock, receive a distribution and immediately purchase the stock outside of the IRA. The investor can then transfer or gift this stock. Investors who choose this option face brokerage fees and taxes associated with an IRA distribution and stock purchase.
Tax Implications of Gifting IRA Assets
Liquidating assets from an IRA to use it to gift stock or cash to another person can have costly tax implications. The IRS taxes all distributions from an IRA at the beneficiary’s marginal tax rate. If the distribution is made before the account holder turns 59 1/2, the IRS levies an additional 10 percent penalty for an unqualified distribution. After income taxes and penalties, the original investor must contend with gift taxes, which the IRS assesses against the value of any gift that exceeds $13,000. Gift tax rates may be as high as 35 percent.
Naming IRA Beneficiaries
Rather than immediately gifting assets from your IRA, you may consider splitting assets into several different IRA accounts and naming each gift recipient its beneficiary upon your death. Although the beneficiaries won’t be able to access the assets during your lifetime, when they receive the IRA, the assets within it can continue to grow tax-deferred based on the beneficiary’s life expectancy. The IRS requires beneficiaries to immediately begin receiving minimum distributions when they receive the assets, but the extended lifespan of the IRA allows the assets to grow in a tax-sheltered account for a much longer period, maximizing their returns.
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