IRA stretch
When the stretch IRA beneficiary is a discretionary trust, can IRA RMDs be allowed to accumulate and grow tax free in the trust without paying income taxes until a distribution is made by the trust’s trustee?
When the stretch IRA beneficiary is a discretionary trust, can IRA RMDs be allowed to accumulate and grow tax free in the trust without paying income taxes until a distribution is made by the trust’s trustee?
Permalink Submitted by Alan - IRA critic on Tue, 2013-12-10 00:29
No. The trust’s 1041 would generate income taxes at the compressed trust tax rates unless the trust has enough deductions to offset that income.
Permalink Submitted by F N on Tue, 2013-12-10 03:54
If the trust has to pay these higher tax rates (higher than personal income tax) then is the solution to distribute the amount that is equal to the RMDs to the beneficiaries who are in a lower tax bracket?
Permalink Submitted by Bruce Steiner on Tue, 2013-12-10 04:14
If the trustees distribute the money, it will be taxable to the beneficiaries, often at lower income tax rates. However, that throws the amounts distributed into the beneficiaries’ estates for estate tax purposes, and exposes it to the beneficiaries’ creditors and spouses. if the trustees accumulate the money in the trust, it won’t be included in the beneficiaries’ estates for estate tax purposes, and it will remain protected against the beneficiaries’ creditors and spouses. The trustees have to consider these factors and any other factors they consider relevant in making their decision. The trustees can decide this on a year by year basis.
Permalink Submitted by F N on Tue, 2013-12-10 21:27
It appears that using the stretch doesn’t seem as good as Slott makes it sound if the trust is forced to pay at the higher tax rates? Any alternative strategies come to mind to preserve IRA assets and maximize accumulation value?
Permalink Submitted by Bruce Steiner on Tue, 2013-12-10 22:33
See above. The trustees can either accumulate the income in the trust to get the asset protection, or make distributions to have the income taxed to the beneficiaries. In either case, the stretch defers the taxation of the IRA benefits, and lets them grow untaxed except to the extent of the required distributions. Bruce Steiner, attorney, NYC, also admitted in NJ and FL.
Permalink Submitted by Norman Cook on Thu, 2019-01-31 01:49
I assume that only while capital gains inside the Roth account are tax free, but onec the RMD or other distribution move into the Accumulative Trust they are taxed at the Trust tax rate. Am I correct?
Permalink Submitted by Bruce Steiner on Sun, 2019-02-03 03:31
No. Distributions from a Roth IRA are tax-free. One of the benefits of a Roth conversion is that, if you leave your IRA in trust rather than outright, the trustees don’t have to choose between making distributions to save income tax or retaining the IRA distributions in the trust at the cost of higher income taxes.
Permalink Submitted by Alan - IRA critic on Thu, 2019-01-31 02:24
Yes, income generated on the funds in the trust will be taxable at the trust rates. The principal will not.
Permalink Submitted by Alan - IRA critic on Sun, 2019-02-03 04:25
To clarify, the distribution of the Roth IRA to the trust is non taxable, but subsequent earnings in the trust on the former Roth money will be taxable.