Can You Transfer Your IRA to Another Person?
IRAs are individual retirement accounts. These accounts act as a tax shelter so that you can save money for your future. A traditional IRA accepts deposits on a tax-deductible basis and then withdrawals are taxed. In a Roth IRA, the contributions are taxed but not the withdrawals. Both types of accounts are individual accounts. Transferring them to another person is only allowed in one particular instance.
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Process
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The process for transferring your IRA to another person is only done when a court orders you to split your IRA with your spouse. This type of order is called a Qualified Domestic Relations Order, or QDRO, and will mandate that you transfer part of your IRA to your spouse. The IRS allows this type of transfer on a tax-free basis.
Significance
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The significance of this is that the IRA is split without any income tax being assessed. Normally, when making a distribution, funds in an IRA are taxed if they are held inside a traditional IRA. With a QDRO, a new IRA is set up in the name of your ex-spouse, and you retain the original IRA.
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Benefit
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The benefit of a QDRO is really for the individual receiving the money. Your spouse will not pay tax on any of the distributions. This means that your spouse gets more money that he otherwise would get if you were to make a normal distribution of the funds.
Warning
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If you attempt to make a distribution from your IRA to another IRA that is not owned by you, the IRS will not allow this transaction to qualify as a tax-free transfer. Instead, you will pay ordinary income tax on the amount and it will be treated as a distribution. If you are under age 59 1/2, you will pay a 10 percent penalty in addition to ordinary income taxes.
Considerations
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Unless you need to make a distribution to another person, as in the case of a QDRO, it's normally best to keep your IRA. If you and your spouse need additional income, and you are under age 59 1/2, consider withdrawals under IRS rule 72(t). IRS rule 72(t) allows you to take early withdrawals from your IRA in equal and substantial amounts according to your life expectancy until the account is completely liquidated or you reach age 59 1/2, whichever comes sooner.
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