Can You Gift Money to a Child From an IRA Without Paying Taxes?

Many wish to provide financial support to their children, whether for education, a home down payment, or to help them establish financial security. Using funds from a tax-advantaged account like an Individual Retirement Arrangement (IRA) for these purposes adds complexity due to specific tax rules. Understanding the tax implications of withdrawing and gifting IRA money is crucial for effective financial decisions.

How IRA Withdrawals Are Taxed

Money withdrawn from an Individual Retirement Arrangement (IRA) is subject to taxation, with specific rules depending on whether the account is a traditional or a Roth IRA. For a traditional IRA, contributions are often tax-deductible, and earnings grow tax-deferred. Distributions from a traditional IRA are generally taxed as ordinary income in the year they are received.

If a traditional IRA distribution occurs before age 59½, it is an “early” withdrawal and incurs an additional 10% penalty tax, plus regular income taxes. However, several exceptions allow for penalty-free early withdrawals, though the distribution remains subject to income tax. Even when an exception waives the 10% penalty, the withdrawn amount from a traditional IRA is still included in gross income and taxed at the individual’s ordinary income tax rate.

Exceptions to Early Withdrawal Penalty

Distributions used for qualified higher education expenses.
Up to $10,000 for a first-time home purchase.
Certain unreimbursed medical expenses exceeding a percentage of adjusted gross income.
Death or disability of the account holder.
Distributions made as part of a series of substantially equal periodic payments (SEPPs).

Roth IRAs operate differently, as contributions are made with after-tax dollars and are not tax-deductible. Qualified distributions from a Roth IRA are entirely tax-free and penalty-free. For a distribution to be qualified, the account must have been open for at least five years, and the account holder must be age 59½ or older, disabled, or using the funds for a first-time home purchase (up to $10,000). If a Roth IRA distribution is non-qualified, the earnings portion is subject to income tax and the 10% early withdrawal penalty, though contributions can always be withdrawn tax-free since taxes were already paid on them.

Applying Gift Tax Rules to IRA Funds

When money is withdrawn from an IRA, it becomes part of the individual’s assets. Any subsequent transfer to a child is then subject to federal gift tax rules. It is important to distinguish this from the income tax paid on the IRA withdrawal itself. The gift tax applies to the transfer of money or property without receiving full consideration in return. The donor is responsible for paying any gift tax, not the recipient.

An annual gift tax exclusion allows an individual to give a certain amount to any number of people each year without gift tax implications. For 2025, this annual exclusion is $19,000 per recipient. Married couples can combine their annual exclusions, allowing them to give up to $38,000 per recipient per year without tax implications.

Gifts exceeding the annual exclusion must be reported to the IRS on Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. While reporting is required, it does not mean gift tax is immediately due.

The excess amount reduces the donor’s lifetime gift tax exclusion. For 2025, the lifetime gift and estate tax exemption is $13.99 million per individual. Gift tax is only owed if cumulative taxable gifts made over a person’s lifetime exceed this substantial lifetime exclusion. The recipient of a gift, such as a child, does not pay income tax on the money or property received.

Directly Supporting a Child’s Financial Needs

Beyond directly gifting withdrawn IRA funds, several alternative strategies exist for financially supporting a child with distinct tax advantages. These methods often involve leveraging specific tax-advantaged accounts or making direct payments for certain expenses, which can minimize or avoid gift tax implications and reduce the tax burden on the funds used.

One strategy involves using funds for qualified higher education expenses. While a traditional IRA withdrawal for education costs is still taxable as ordinary income, the 10% early withdrawal penalty is waived. Direct payments made to an educational institution for a child’s tuition are not considered gifts for gift tax purposes and are not subject to the annual gift tax exclusion. This exclusion applies only to tuition, not to other costs like room, board, or books.

Establishing a 529 plan is another effective way to save for education. Contributions to a 529 plan grow tax-deferred, and withdrawals are tax-free if used for qualified education expenses. While contributions to a 529 plan are considered gifts, they can utilize the annual gift tax exclusion. A special provision allows for “superfunding,” where an individual can contribute up to five years’ worth of annual exclusions at once without triggering gift tax, such as $95,000 for an individual in 2025. This large contribution is then spread over five years for gift tax purposes.

If a child has earned income, parents can contribute to a Roth IRA in the child’s name up to the annual contribution limit or the child’s earned income, whichever is less. These contributions are made with after-tax dollars, and the funds grow tax-free, with qualified withdrawals in retirement also being tax-free for the child. This approach allows for tax-free growth and distributions for the child’s future, without the parent needing to make a taxable withdrawal from their own IRA.

For general savings, custodial accounts like Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts can hold assets for a minor. Contributions to these accounts are considered gifts and are subject to the annual gift tax exclusion. Income generated within these accounts is taxed to the child, often at lower tax rates. However, unearned income above a certain threshold, such as $2,700 for 2025, is subject to the “kiddie tax,” meaning it is taxed at the parents’ marginal tax rate.

Finally, direct payments for a child’s medical expenses are not considered taxable gifts. Similar to tuition payments, these payments must be made directly to the medical provider or insurance company to qualify for this unlimited gift tax exclusion.