Trust Tax on Roth Earnings in RFT
An IRA provider gave me the following advice on my RFT being beneficiary of my Roth. It’s a little confusing. Does it sound right? Anyone?
“Just to be clear the earnings for the 10 years are tax-free as long as they’re left in the Roth. They are considered in the Roth if they are left in the LLC. so all your new earnings can be tax-free for that 10 years as long as you leave them in the LLC. But if you do take a distribution whatever amount of money you take out of the Roth IRA and give to the trust from there on in it is taxable in the trust. Of course, if you did that, the smart move would be to move it through the trust to the beneficiaries.”
“So you’re in good shape. Keep your investments in the Roth IRA LLC until the years are up. If you decide to leave it in the trust, then realize from there on in anything new will be taxed.”
Thanks!
Permalink Submitted by Alan - IRA critic on Tue, 2024-06-25 04:27
Sounds like you have a self directed Roth IRA, which owns the LLC, but the rules are the same as for a standard Roth IRA left to a trust (you mean RLT, not RFT?). Gains in a qualified Roth IRA are tax free and additional earnings inside the Roth IRA are also non taxable. But with the 10 year rule applying for most Roth beneficiaries, the inherited Roth must be distributed by the end of the 10 years to the trust. This is a non taxable distribution, but then additional earnings in the trust that occur after the Roth IRA was distributed will be taxable, either at the trust tax rate if the earnings are accumulated in the trust or at the beneficiary rate if those gains are passed out of the trust to the trust beneficiary. Sounds like this is what the IRA provider was saying and is correct.
Permalink Submitted by Ed Ricketts on Tue, 2024-06-25 07:38
Hi Alan!
So if I understand, I can make my RLT the beneficiary of my Roth IRA. My restrictions are that my granddaughter may not receive any funds until age 25. So if I die 7 years before Hailey is 25, the Roth IRA may be reinvested (compounded) .
Permalink Submitted by Ed Ricketts on Tue, 2024-06-25 07:52
Hi Alan!
So if I also understand, I can make my RLT the beneficiary of my Roth IRA. My restrictions are that my granddaughter may not receive any funds until age 25. So if I die 7 years before Hailey is 25, the Roth IRA may be reinvested (compounded) .
But, if I as a provision of the RLT, reduce grassnggaughters if teasterday.
Permalink Submitted by Alan - IRA critic on Tue, 2024-06-25 12:09
If the trust must hold the proceeds of the Roth IRA distribution for a time until GD is 25, any gains on those funds in the trust will be taxable at the higher trust tax rates rather than GD’s lower tax rate.