The costs of retirement can be so hard to predict and investments can be so fickle that you can find yourself having put aside far more than you need to retire. If so, you may want to give of your excess to others including relatives, friends or charities. However, no matter what your age, to gift out your individual retirement account, you've first got to take a distribution.
Even if you've struck it rich and can prove that you'll never have to work another day in your life, the IRS doesn't consider you "retired" for the purposes of taking an IRA distribution until you're at least 59 1/2 years old. To discourage you from raiding your IRA before retirement age, the IRS hits the distribution with an extra 10 percent penalty, unless an exception applies. Unfortunately, giving the money away, even to a qualified charity, isn't an exception to the penalty.
No Direct Giving
You can't give money from your IRA to another person, or even another person's IRA, without first taking it out of your own. When you take the money out of your IRA, you're going to have to include the distribution as part of your taxable income, which is taxable at your income tax rate. For example, you can't shift the income to someone else who pays a lower tax rate by giving the money to them. If you later give it to a qualified charity, and you itemize your deductions, you can claim a write-off for the donation on Schedule A.
Gift Tax Implications
Only the tax code would impose an extra tax on people who give away too much money. As of 2012, any gift you make over $13,000 could make you liable for gift tax. However, certain gifts are automatically exempt from this limit, including charitable contributions, gifts to your spouse, gifts for tuition or medical bills, or political contributions. For example, if you give $20,000 to the Red Cross and $20,000 to your son for medical bills and $20,000 to your best friend to take a dream vacation, you would have $7,000 in taxable gifts because the charitable donation and the gift for medical bills are exempt.
Qualified Charitable Distributions
Through the 2011 tax year, the IRS allowed people to use a qualified charitable distribution to give their required minimum distribution as a donation to charity. To qualify, you have to have your IRA trustee transfer the distribution directly to the charity instead of paying it to you first. The advantage to this distribution method is that you don't have to report the distribution as taxable income, so you can take advantage of the donation even if you don't itemize your deductions. However, as of May 2012, QCDs had not been extended for future tax years.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."