Inherited IRA with RMD of minor beneficiary to go to UGMA/UTMA account

Submitted by abraham boznick on Thu, 2019-02-28 09:45

Under current law custodial UGMA/UTMA account will pay 0 federal tax if there $4,700 yearly unearned income in this account (such as normally coming from capital gains, etc). Can a minor be made one of the beneficiaries of the IRA inherited account such that minor yearly RMD will be at around $4,700 going into this custodial account (assume no other income from other sources comes into this account). In this case there will be a 0 federal tax paid by the minor? Am I correct on that?



Submitted by William Tuttle on Thu, 2019-02-28 14:42

  • With no earned income in 2018 only the first $1050 is tax free, next $1050 is taxed at the dependent’s rate (10%) and the next $2550 is subject to the first trust tax bracket (10%). So $4650 in an RMD will have $370 in income taxes. So not 0%, but at < 8% still less than an adult's likely marginal rate.
  • The respective amounts in 2019 are $1100 and $2600.
  • The $4700 is the amount of qualified dividends and capital gains in a taxable UTMA account that would be tax free in 2018.
  • Note: The trust tax brackets are compressed. The 2018 37% tax bracket begins at $12,500 and 2019 at $12,750.

Submitted by Frank Miyamura on Thu, 2019-02-28 16:08

I would be interested how this senario would play out for a minor inheriting a Roth IRA. If a guardian parent establishes an UTMA for the child to receive the IRA’s yearly RMDs, at what level of tax free Roth IRA income become a tax problem? I’m guessing that it’s when the funds in the UTMA account’s income from its investments reaches the yearly taxable income levels explained so well in the earlier post. So if the parent manages the UTMA account distributions and investments so that its taxable UTMA yearly income is below taxable limits, no tax is owed and no tax return is required for the child? Is this correct? If yes, is it still advisable to file a tax return anyway? Thank you in advance for all of your thoughtful responses and for having this wonderful platform for all of us to ask questions.  I’ve learned so much.   Frank

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