If I gift my IRA distributions, what are the tax liabilities?
Q. If I transfer my Required Minimum Distribution to a church or for grandchild’s tuition, etc., what are the tax implications?
— Planning
A. You didn’t say which retirement accounts, but we’re going to assume your distribution would be coming from a traditional IRA.
If your account is a traditional IRA with tax deductible contributions in it, then you can make what is called a Qualified Charitable Distribution (QCD) if you are over the age of 70 ½, said Deva Panambur, a fee-only planner with Sarsi, LLC in West New York and an adjunct professor of personal finance at Montclair State University.
A QCD is a non-taxable distribution made directly by the trustee of your IRA — except SEP IRAs and SIMPLE IRAs — to an eligible charitable institution, he said.
“The maximum annual exclusion for a QCD is $100,000 and limited by the amount of distribution that would otherwise be taxable- so nondeductible contribution is not included in a QCD,” he said. “Your spouse is also eligible for $100,000 of annual QCD if you file your taxes jointly.”
The QCD will count towards your Required Minimum Distribution (RMD), he said.
Panambur said if you use funds from an IRA or any retirement account to pay for the tuition of your grandchild by paying the educational institution directly, the amount will not be counted towards gift taxes and generation skipping transfer taxes even if it is over $15,000, which is the annual exclusion for gift taxes, he said.
You will still have to pay income taxes on the distribution, he said.
“If your grandchild is expected to incur educational expenses in the future, then you can open a 529 plan and transfer your RMD to that account,” he said, noting that there is no federal tax benefit when the account is funded.
Some states — not New Jersey — allow a deduction against state taxable income, he said.
“In New York, the deduction is $5,000 per person or $10,000 for spouses that file taxes jointly,” he said. “The funds in a 529 plan grow tax free and withdrawals are not taxable if used for eligible educational expenses of your grandchild.”
The above article was orginally published on Sep 1, 2021. As of April 2024, New Jersey taxpayers, with gross income of $200,000 or less, may qualify for a state income tax deduction for contributions into an NJBEST (NJ 529 plan) plan of up to $10,000 per year.