An individual retirement account is not something that can be passed from one living person to another. It is, the IRS explains, "a trust or custodial account set up in the United States for the exclusive benefit of you or your beneficiaries." While you can't make a gift of the account itself, there are a few ways to give the money in your IRA to a relative.
If you want to give money from your IRA to someone else while you're alive, you must make a withdrawal from your account. When you take money out of your IRA, you will owe income tax on the amount received. If you are younger than 59 1/2, you'll also owe an extra 10 percent early withdrawal penalty. Once you've paid these taxes, the remaining money is like regular cash. You can give it away as you see fit.
For gifts that exceed a certain amount, you must pay a gift tax. As of 2012, you can makes gifts of up to $13,000 per recipient per year without incurring a gift tax. If you give any one person more than $13,000, you've made a taxable gift. The gift tax rate as of 2012 is 35 percent. You -- as the person making the gift -- are required to either pay the gift tax or apply it against your unified credit, which grants each individual a lifetime credit on up to $1.73 million in estate and gift taxes, as of 2011. Even if you don't pay the gift tax in this year and you opt instead to deduct it from your credit, you must file Form 709 with the IRS to report your gift tax liability.
If you wait to transfer your IRA until after you die, the tax laws become a lot less strict. When you own an IRA, you must name someone as the beneficiary. This is the person that inherits the account after you die. The estate of a deceased person whose IRA is transferred to a beneficiary is not taxed.
A spouse named as beneficiary of an IRA may treat it as though it has been her account all along. She can take money out or leave it in the IRA. If you leave the IRA to a family member other than your spouse, he must start taking distributions sooner. He can cash out the entire account at once or convert the IRA into a life annuity, which will give him monthly payments for the rest of his life.
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