Taxation of Roth IRA Earnings When Revocable Living Trust is Beneficiary

Submitted by Ed Ricketts on Tue, 2023-10-10 18:34

If I make my RLT beneficiary of my Roth IRA so I can control how my granddaughter spends the money and to ensure she leaves the balance alone for 10 years so the Roth can continue investing, do trust taxes apply to earnings of the Roth?



Submitted by David Mertz on Tue, 2023-10-10 19:22

  • If the trust does not permit distributions to be made from the Roth IRA before the 10th year following the year of your death, the Roth IRA will be qualified by the time any distributions are made such that the distributions will be nontaxable.
  • If the trust permits any distributions to be made before the end of the 5-year period beginning on January 1 of the year for which you first made a Roth IRA contribution, any such distributions of earnings, which come out last under the Roth IRA ordering rules, will be taxable.  The trust would typically pass taxable income through to a trust beneficiary for taxation on the beneficiary’s tax return at the beneficiary’s marginal tax rate rather than being taxed at trust tax rates.


Submitted by Ed Ricketts on Thu, 2023-10-12 16:45

Specifically, if my heir does not touch the Roth principal and interest for 10 years (after my death), and the  trustee keeps investing the Roth at 11%, are the earnings ever subject to taxation? 



Submitted by David Mertz on Thu, 2023-10-12 17:38

Once it has been at least 5 years since the beginning of the year for which you first made a Roth IRA contribution and you have died, any distributions from the Roth IRA will be qualified distributions, free of any tax.



Submitted by fairira on Fri, 2023-10-13 21:06

Re post with above subject submitted by edwinjrickettsg… on Thu, 2023-10-12 09:45 titled “Roth IRA in Living Trust: Are Roth IRA Earnings Taxable?” and that asked “Specifically, if my heir does not touch the Roth principal and interest for 10 years (after my death), and the  trustee keeps investing the Roth at 11%, are the earnings ever subject to taxation?”  I would like to ask edwinjrickettsg… if he will kindly share how or where he is able to keep investing at 11%. 



Submitted by Ed Ricketts on Tue, 2023-10-17 23:18

I invest in private notes. The trustee would continue to do so throughout the 10-year period after my demise. But my question is, is there trust tax that applies to earnings during the 10 years?



Submitted by Alan - IRA critic on Tue, 2023-10-17 23:25

There is no tax for earnings generated in the inherited Roth IRA, but once the 10 years is up and the Roth IRA is distributed to the trust, earnings generated after that distribution in the trust will be taxable at the higher tax rates for trusts. 



Submitted by Alan - IRA critic on Tue, 2023-10-10 19:52

You also need to be sure that the trust itself is qualified for look through or the 5 year rule will apply. That would require the Roth to be distributed to the trust, and although the funds could still be held in the trust for 5 more years, any investment gains generated after the Roth is distributed would be taxable. The trustee of the trust is required to submit the trust beneficiary data to the Roth IRA custodian by 10/31 of the year following the year of your death, and if that deadline is missed the trust will not be qualified.



Submitted by Ed Ricketts on Tue, 2023-10-17 23:22

What if the trust is see-through? So, I have 10 years, right? During that time, I want the Roth to keep growing. Are the earnings of the trust during that 10-year period taxable?



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