How to Transfer a Roth IRA to a Living Trust

A living trust is one way to leave more money for your heirs.
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Transferring a Roth IRA into a living trust can have some benefits, but the best way to make the transfer depends on your particular situation. If you make the transfer while you’re alive and well, your Roth IRA acts just as it did before and you can keep complete control. If you become incapacitated or die, the trust makes sure that money in your Roth is handled as you’ve specified, including provisions to provide for your care.

Living Trust Basics

A living trust holds a person’s assets while that person is still alive and has provisions for what to do if the person dies or becomes incapacitated. The trust is managed by a trustee that the grantor, or person establishing the trust, designates. Often the trustee and the grantor are the same person and the owner continues to manage his own assets. Placing an IRA in a trust allows it to be stretched out to provide for a beneficiary over a period of many years.

Funding a Trust

Changing asset ownership from one name into the trust’s name is known as funding the trust. Once an asset is moved, the trust owns it. Generally, it’s smart to put all of your long-term assets into the trust; it can be easier to manage them that way. It’s also an easy way to provide for your own long-term care should you need it or leave everything to whoever you wish without the need for probate. When managed properly, your Roth IRA will grow and provide your beneficiary with more income than if it had been paid out immediately.

Tax Considerations

Taxes have already been paid on the contributions to a Roth IRA. Once it’s in a trust, money added to the Roth IRA will continue to be paid from after-tax funds and the same tax laws apply. This means that qualifying withdrawals from the trust’s Roth IRA will continue to be tax-free, but penalties will also apply if you take money out too soon. If your IRA ends up going to a beneficiary, capital gains or inheritance taxes may apply, but putting the Roth into a trust can help minimize the impact of taxes.

Funding After Death

One of the best ways to transfer a Roth IRA into a living trust is to set up the Roth so that the trust is the beneficiary. This means that if something happens to you your IRA money will end up going into your trust and not being paid directly to your beneficiaries. Since an inheritance is taxed pretty heavily, this can provide enormous tax benefits to the people you care about. They can still access the money in the trust when they need it, and this method will avoid some of the tax burden they might otherwise have to bear.

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