You can't deposit your Individual Retirement Account (IRA) in a trust while you're living. However, you can name a trust as the beneficiary of your IRA and dictate how the assets will be managed after your death. This applies to all types of IRAs, including traditional IRAs, Roth, SEP and SIMPLE. In most cases, the owner of an IRA designates a trust as the beneficiary of the IRA to have control over the disposition of assets after their death.
The following are some of the reasons why an IRA owner might do this:. If we return to our previous example, the three children will still have to receive their respective share of the inherited IRA, even if it is held under a trust. They will have the fiduciary benefits of asset protection and tax deferral as long as the assets remain in the IRA. Any withdrawals made from the IRA will be paid directly to each of them through the trust.
This may be contrary to the IRA owner's original intention to leave retirement assets in the hands of a trust, with the expectation that the IRA, through the trust, will make small distributions each year to the beneficiary. Since the length of time allowed to withdraw funds from an inherited IRA varies depending on the age at which the owner of an IRA dies, the best tax strategy for an inherited IRA may change over time. Another option is to convert a traditional IRA into a Roth IRA and avoid taxing distributions to the trust and beneficiaries. Surviving spouses also receive special treatment in which they are allowed to step into the owner's shoes and withdraw the balance of the IRA during their life expectancy, or they can convert the inherited IRA into their own IRA.
This legislation modified the treatment of inherited IRA distributions for any owner of an IRA who died after January. The previous stretch rule has been replaced, for most beneficiaries, by a 10-year rule requiring that the IRA be distributed in full before the end of the tenth year following the year of the death of the IRA owner. EDBs include surviving spouses, minor children of the original owner of the IRA (up to the age of majority), people with disabilities or chronic illnesses, and beneficiaries who are no more than 10 years younger than the original owner of the IRA. .
Even if an IRA must pay under the 5-year rule to a trust designated as the beneficiary of the IRA, it doesn't necessarily mean that the IRA assets are distributed to the trust's beneficiaries within five years. For example, if the trust is completely discretionary, once the IRA assets are distributed from the IRA to the trust itself, the after-tax IRA income will remain invested in other trust assets until the trustee exercises his discretion to make a distribution to one or more of the beneficiaries. Trust income tax treatment of IRA distributions IRA distributions are considered taxable income and, as such, are taxed to the trust. The IRA would make distributions to the surviving spouse based on their life expectancy and, when they died, the assets would be passed on to their children with the requirement that they be distributed from the IRA within 10 years.
And, if the IRA has a high rate of return on investment, your IRA may have a higher value when you died than when you started taking RMD. For most beneficiaries, the previous expansion rule has been replaced by a 10-year rule requiring that the IRA be fully distributed before the end of the tenth year following the year of the death of the IRA owner. And, if the IRA has a high rate of return on investment, the IRA may have a higher value at death than when the client started accepting RMD. .