Your Individual Retirement Account is supposed to be for your own personal retirement. As a result, the Internal Revenue Service does not let you directly gift your IRA assets to other people. The only exception is if you're making a gift to charity. If you do want to transfer IRA funds to the people in your life, there are a few ways to get it to them without incurring the wrath of the IRS.
If you want to give away IRA assets while you're alive, you need to make a personal withdrawal from your account. You'll owe income tax on the entire amount, plus an extra 10 percent early withdrawal penalty. The IRS charges this extra penalty on your IRA withdrawals until you turn 59 1/2. You can give the money to whomever you want since the taxed withdrawal effectively turned your IRA assets into regular cash.
You could owe extra taxes if you give away IRA assets. As of 2012, you could make tax-free $13,000 gifts to as many people as you want throughout the year. However, if you give any one of them more than that, you've made a taxable gift. The 2012 gift tax rate was 35 percent. It's your duty as the donor to pay any taxes on your IRA gifts.
If you still have money left in your IRA after you die, the account will transfer to your named beneficiary. If you leave your IRA to your spouse, she can treat it like her own account. If you leave the IRA to someone else, he must make withdrawals. He can either cash out the entire account immediately or convert the IRA assets into a life annuity. That investment will give him monthly payments for the rest of his life.
In 2010, the IRS eased the taxes on gifts of IRA assets to charities. Before 2010, the IRS expected the giver to first pay withdrawal taxes on any such gift. As of 2012, you can take out up to $100,000 from your IRA and give it to charity tax-free. To qualify for this treatment, you need to write a check directly to the charity from the IRA account. You can't withdraw the money into your bank account first. If you do, the IRS counts it as a regular withdrawal, and you'll owe income tax on that money.
David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.