While you can name your child as a beneficiary of your IRA account to receive the money in the account when you die, you can also take distributions from your account and give this money to your child while you're still alive. These distributions while you're alive are subject to the laws concerning gifts as well as distributions from a retirement account. In some cases, you may be responsible for paying taxes and penalties on IRA distributions that you give to a child.
You can take distributions from an IRA without penalty to pay for expenses for higher education for yourself, your spouse, your children and your grandchildren. Allowable expenses are tuition, books and other fees, including costs related to having a child with special needs attend college. In addition, if your child is enrolled for more than half the time in classes, you can take distributions from your IRA without penalty to pay for room and board.
First-Time Home Purchase
When your children purchase a first-time home, you can take a distribution from your IRA account and give it to them without penalty to assist with this purchase. Your spouse can also do the same thing. The lifetime maximum that can be taken from an IRA to do this is $10,000. A first-time home purchase is considered the purchase of a home after you have had no ownership interest in your primary residence for at least two years. First-time home purchase distributions without penalty are allowed for your own purchase, and purchases your parents make as well.
You can take a distribution from your IRA account to give to your child for any reason, as these are your funds and you can use them for any purpose you desire. If you are over age 59 1/2, you won't have to pay a penalty on these distributions, but unless you have another circumstance allowing you to take a penalty-free distribution, when you're younger than age 59 1/2, you'll pay the penalty as well as any applicable taxes on the amount you withdraw.
Unless you're taking the distributions and giving this money to your child for a reason that is exempted from the gift tax, you must comply with IRS regulations concerning gifts and pay any applicable gift taxes that you may owe on the money. You can make a gift of up to $13,000 per year to any one individual for any reason and not pay a gift tax. If you are married, your spouse can also make the same gift. Examples of exempt gifts are money given to pay for tuition at a secondary school, or money used to pay medical expenses.
- Internal Revenue Service: Publication 970 -- Education Exception to Additional Tax on Early IRA Distributions
- Bankrate.com: IRS Rules for Early IRA Withdrawals
- CNN Money: Ultimate Guide to Retirement -- When Are IRA Withdrawals Penalty-Free?
- Internal Revenue Service: Frequently Asked Questions on Gift Taxes