You cannot put your individual retirement account (IRA) in a trust while you are living. You can, however, name a trust as the beneficiary of your IRA and dictate how the assets are to be handled after your death. This applies to all types of IRAs, including traditional, Roth, SEP, and SIMPLE IRAs.
Pouring your Roth assets into a trust after your death can be a good idea—as long as you've chosen the right type of trust and your beneficiaries are specifically named in the trust. A conduit trust takes out the beneficiary's required minimum distributions (RMDs) each year.
The simple answer is yes, a living trust can be the beneficiary of a Roth IRA. However, without knowing more about an individual's specific circumstances, it's hard to know if this is a wise move.
Retirement accounts definitely do not belong in your revocable trust – for example your IRA, Roth IRA, 401K, 403b, 457 and the like. Placing any of these assets in your trust would mean that you are taking them out of your name to retitle them in the name of your trust. The tax ramifications can be disastrous.
However, a trust also can be named as an IRA beneficiary, and in many instances, a trust is a better option than naming an individual. When a trust is named as the beneficiary of an IRA, the trust inherits the IRA when the IRA owner dies. The IRA then is maintained as a separate account that is an asset of the trust.
An irrevocable trust can be used either during the IRA owner's lifetime or upon his death; however, tax considerations typically favor using a revocable trust during owner's lifetime, which becomes irrevocable upon the owner's death.
The advantage of the IRA trust is that the distributions are controlled by the trustee instead of the beneficiary. The trustee, of course, can withdraw more than the required distribution from the IRA any time he wants to. The rules of the trust determine when distributions are made to the beneficiary.
You cannot put your individual retirement account (IRA) in a trust while you are living. You can, however, name a trust as the beneficiary of your IRA and dictate how the assets are to be handled after your death. This applies to all types of IRAs, including traditional, Roth, SEP, and SIMPLE IRAs.
IRA distributions are considered taxable income and as such are taxed to the trust. The maximum tax rate for trusts is 39.6% and is reached with only $12,400 in taxable income. However, if the trust distributes any portion of its income, that income is taxed directly to the beneficiary of the trust.
When you pass your Roth IRA through a living trust, your beneficiaries will receive the Roth assets tax-free. Doing this also allows you to "stretch your IRA." When a traditional IRA is paid out in retirement, there are Required Minimum Distributions (RMDs).
Do heirs pay taxes on Roth IRAs? Heirs, in most cases, can take tax-free withdrawals from a Roth IRA over a 10-year period. Spouses who inherit Roth IRAs can treat the accounts as their own.
In most cases, heirs can make tax-free withdrawals from a Roth IRA over 10 years. Spouses who inherit Roth IRAs can treat the accounts as their own. That is, there are no deadlines for withdrawals.
It's generally a bad idea to name a trust as beneficiary of your IRA. The IRA usually loses the power of tax deferral, because it must be distributed faster than in other scenarios.
Conventional wisdom suggests that inheriting a Roth IRA is always better than inheriting a traditional IRA. In the case of the former, the distributions are tax-free and in the case of the latter, distributions are taxed as ordinary income.
In short, YES, you can designate a trust as the future beneficiary of your 401(k) retirement account. Leaving your inheritance in a trust allows you to control where and how your assets are divided after your death.
Some of your financial assets need to be owned by your trust and others need to name your trust as the beneficiary. With your day-to-day checking and savings accounts, I always recommend that you own those accounts in the name of your trust.
With that said, revocable trusts, irrevocable trusts, and asset protection trusts are among some of the most common types to consider. Not only that, but these trusts offer long-term benefits that can strengthen your estate plan and successfully protect your assets.
Revocable, or living, trusts can be modified after they are created. Revocable trusts are easier to set up than irrevocable trusts. Irrevocable trusts cannot be modified after they are created, or at least they are very difficult to modify. Irrevocable trusts offer tax-shelter benefits that revocable trusts do not.
The downside to irrevocable trusts is that you can't change them. And you can't act as your own trustee either. Once the trust is set up and the assets are transferred, you no longer have control over them.
Naming beneficiaries for qualified retirement plans means that probate, attorneys' fees, and other costs associated with settling estates are avoided. Naming a trust as a beneficiary is a good idea if beneficiaries are minors, have a disability, or can't be trusted with a large sum of money.
The simple answer is yes, in most cases a trustee can transfer an inherited IRA out of the trust to the trust beneficiary or beneficiaries without any negative tax consequences. Of course (surprise!)
With your estate as the beneficiary of your IRA or plan, the money in the account is first distributed to your estate, and then passes to your heirs according to the terms of your will. Having your estate as beneficiary is usually the worst possible beneficiary choice in terms of tax implications.