The unified gift and estate tax exemption is scheduled to drop from $5,120,000 to $1,000,000 as of January 1, 2013. This has prompted IRA account owners, and some advisors, to consider gifting retirement assets to children and grandchildren. For Roth IRA owners this would seem to be an especially attractive strategy. Who wouldn’t want to move an income-tax-free asset that has no step up in basis out of their estate to their beneficiaries?
Unfortunately, IRAs, including Roth IRAs, cannot be transferred, assigned or gifted during the account owner’s lifetime. It just can’t be done. The tax code prohibits this. This includes “moving an IRA into a trust,” but that is a topic for another day. The only exception to the “no transfers during life” rule is for a transfer to an ex-spouse as part of a divorce.
What happens if you have already done this? The amount gifted is considered a distribution to you. If the funds were pre-tax IRA funds or certain distributions from a Roth IRA, the distribution will be taxable to you and could also be subject to the 10% penalty if you are under 59 ½. A large enough distribution can put you in a higher tax bracket, reduce your deductions and credits, expose your Social Security payments to income tax, and perhaps even make you subject to the alternative minimum tax (AMT).
As for the recipient of your gift, they do not have an IRA. If the funds are put into an IRA in their own name, they could have an excess contribution to their IRA. Excess contributions are subject to a penalty of 6% a year on the amount of the excess for each and every year it remains in the IRA. The penalty is reported on IRS Form 5329 each year. If the form is not filed, the statute of limitations on the penalty does not start to run so IRS can snag you years after the event.
So, do your beneficiaries a favor and hold on to your IRA accounts. Make sure your beneficiary forms are up to date and let your beneficiaries know that they should talk to a qualified advisor when they eventually inherit your IRA funds. You can find a listing of Ed Slott trained advisors on our website, www.irahelp.com.
- Gift tax exemption scheduled to drop to $1,000,000 for 2013
- IRA owners are asking if they can "gift" their IRA to their beneficiaries now
- Tax code does not allow for "gifting" an IRA
- By Beverly DeVeny and Jared Trexler