While it’s not possible to put an individual retirement account (IRA) in a trust while you’re alive, you can name a trust to be the beneficiary of your IRA assets after you die. This can be done with traditional IRAs as well as Roth IRAs, SEP, and SIMPLE IRAs.
Trusts are an estate-planning tool that can be useful for passing on assets to others after your death. Assets you can transfer to a trust include investments like stocks and bonds, real estate, bank accounts, and antiques — but not IRA accounts, per se.
Rather, the trust would become a beneficiary of the IRA, and assets within the IRA would transfer to the trust after your death, with instructions about how and when those assets should be distributed.
Key Points
• You can effectively put an IRA in a trust after you die by naming the trust as the beneficiary of the IRA.
• Naming a trust as the beneficiary of an IRA allows you, the IRA owner, to manage how and when assets will be distributed after your death.
• This arrangement can be used for any type of IRA: traditional, Roth, SEP, or SIMPLE.
• Setting up a trust as an IRA beneficiary requires that you establish a trust, identify a trustee, and name the trust beneficiaries, who will then inherit the IRA assets.
• Benefits include greater control over how IRA assets are distributed; drawbacks include the cost and time involved in setting up a trust.
What Is an IRA?
To recap what an IRA is, it’s an individual retirement account that allows you to save and invest on a tax-advantaged basis.
You can open an IRA at brokerages, banks, and other financial institutions that offer them. There are different types of IRAs you can fund; each with its own set of restrictions:
• Traditional IRA: A traditional IRA typically allows you to make tax-deductible contributions. Withdrawals are taxed at your ordinary income tax rate.
• Roth IRA: Roth IRAs do not allow for deductible contributions. However, qualified withdrawals are tax free.
• SEP and SIMPLE IRAs: SEP and SIMPLE IRAs are designed for small business owners and self-employed individuals. Similar to traditional IRAs, these plans are tax-deferred, but generally have higher contribution limits.
How much can you put in an IRA? The IRS determines how much you can contribute to an IRA each year. The maximum contribution for tax year 2024 is $7,000; an additional $1,000 catch-up contribution is allowed for people aged 50 or older.
Anyone with earned income can contribute to a traditional or a Roth IRA. There are some rules to know, however:
• The amount of traditional IRA contributions you can deduct, if any, is based on your income and filing status and whether you (or your spouse, if married) are covered by an employer’s retirement plan.
• The amount of Roth IRA contributions you can make each year is determined by your income and tax filing status. If your income is too high, you may be ineligible to contribute to a Roth IRA.
The assets in any of these types of IRAs could be transferred to a trust upon your death, as long as you name the trust the beneficiary of the IRA account.
Recommended: Calculate Your 2024 IRA Contribution Limits
Inherited IRAs
Before deciding whether to transfer your IRA assets to a trust upon your death, you may want to consider the rules for inherited IRAs. Leaving the funds in the IRA to be inherited by a beneficiary such as your spouse, child, or grandchild is also an option, rather than going to the trouble of setting up a trust.
Inherited IRA rules can be complicated, however. When it comes to IRAs, there are two types of beneficiaries: designated and non-designated. Designated includes people, such as a spouse, child, or friend. Non-designated beneficiaries are entities like estates, charities, and trusts.
Depending on the beneficiary’s relationship to you at the time of your death, as well as your age, different rules will apply to how IRA funds can be accessed and distributed. For example, all inherited IRAs obey a set of IRS rules pertaining to the distribution of funds. But when you set up a trust as the beneficiary for an IRA, the funds can be distributed according to parameters that you have established.
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How Does a Trust Work?
A trust is a legal entity you can establish for the protection and distribution of assets after you die. State law determines the process for creating one, but generally here’s how a trust works:
• You create the trust document on paper, either by yourself or with the help of an estate planning attorney.
• You name a trustee who will manage trust assets on behalf of the individuals or entities you name as beneficiaries.
• Once the trust is created, you typically can transfer assets to the trust and control of the trustee. With an IRA, you would name the trust as the beneficiary of the IRA assets.
• The assets are transferred to the trust upon your death, and the trustee oversees the distribution of the funds to the beneficiaries of the trust.
• In many cases, the assets in a trust are not subject to probate after you pass. This can streamline the transfer of assets, and also ensure some privacy.
More Facts About Trusts
• A trustee is a fiduciary, meaning they’re obligated to act in the best interests of you and the trust’s beneficiaries. The trustee has an ethical duty to manage the trust assets according to the terms you spelled out in the trust document.
• There are different types of trusts you can consider, but generally they can be classified as revocable or irrevocable: A revocable trust can be altered or canceled, while an irrevocable trust is permanent.
• In estate planning, a trust is separate from a person’s will. A will is a legal document you can use to specify how you’d like assets to be distributed after your death or name a guardian for minor children.
Can an IRA Be Put in a Trust?
An IRA can be put in a trust, but it cannot be transferred to a trust during your lifetime. You can, however, establish a trust and name it as the beneficiary of your IRA.
Naming a trust as the beneficiary of your IRA assets can give you more control over how and when the funds are distributed.
Making a trust the beneficiary to your IRA may be as simple as updating your beneficiary elections with the company that holds your account, assuming the trust has already been created. Your brokerage account may allow you to make a change to your beneficiary designation online or require you to mail in a new beneficiary election form.
What Happens When You Put an IRA in a Trust?
When you name a trust as the beneficiary of an IRA, funds in the IRA account are directed into the trust once you pass away. IRA funds can then be distributed among the trust’s beneficiaries, according to the conditions you set.
Moving an IRA to a trust would not affect the beneficiary designations for any other retirement accounts you might have, such as a 401(k).
Reasons Someone Might Put Their IRA in a Trust
There are different scenarios in which it might make sense to name a trust as your IRA beneficiary, versus passing it on to your heirs directly. You might choose to do so if you:
• Want to set specific conditions or restrictions on when beneficiaries can access IRA assets.
• Are interested in creating a legacy of giving through your estate plan and have named one or more charities as trust beneficiaries.
• Want to protect IRA assets from creditors.
• Need to set up a trust for a special needs beneficiary.
Control is often the biggest reason for naming a trust as an IRA beneficiary. For example, say one of your children is a spendthrift. If you were to name them as beneficiary to your IRA, then they’d have free access to that money once you pass away.
Instead, you could name the trust as beneficiary, with a stipulation that your child is only able to withdraw a certain amount of money from the IRA each year, or only for a certain purpose (e.g., their education). Or you could specify that the IRA assets should only be released to them when they reach a certain age.
Things to Consider Before Putting an IRA in a Trust
Before setting up a trust for an IRA, it’s important to consider whether it actually makes sense for your situation.
Here are some questions to weigh:
• What are the goals of the trust, and specifically for the IRA assets?
• Will you transfer other assets to the trust as well?
• Which type of trust should you open?
• Who will benefit from the trust itself?
• What are the tax implications for beneficiaries?
• Who is the best choice to act as executor?
It’s also important to factor in the cost of setting up and maintaining a trust. Doing it yourself could save you the expense of hiring an attorney, but that might not be an option if you have a complex estate.
Once the trust is created, there may be additional costs including any fees the executor is entitled to collect.
How Can You Put an IRA in a Trust?
As mentioned, you cannot transfer an IRA into a trust during your lifetime. To plan for a trust to be the beneficiary of an IRA, you’ll need to take the following steps.
1. Open an IRA
If you don’t already have a retirement account, opening an IRA is a good place to start. That’s easy to do, as many brokerages allow you to set up a traditional, Roth, SEP or SIMPLE IRA online. When deciding where to open an IRA, pay attention to:
• The range of investment options offered
• What you might pay in fees
• How easily you’ll be able to access and manage your account (i.e., website, mobile app, etc.)
You can open an IRA with money from a savings account or rollover funds from another retirement account.
Recommended: A Beginner’s Guide to Opening an IRA
2. Establish a Trust
Once you have an IRA, you’ll need a trust to name as its beneficiary. You could create a simple living trust yourself using an online software program. Remember that the rules governing trusts vary depending on the state.
If you have a more complicated estate, you might want to work with an attorney.
Here are some of the key steps to establishing a trust:
• Select the trust type. As mentioned, there are different types of trusts to choose from. If you’re unsure which one might be right for you, it may be helpful to talk to a professional.
• Choose a trustee. Your trustee should be someone you can rely on to manage trust assets ethically. It’s possible to name yourself as the trustee in your lifetime, with one or more successor trustees to follow you.
• Decide which assets to transfer. An IRA isn’t the only thing you might transfer to a trust. You’ll want to take some time to decide what other assets you’d like to include.
• Set the rules. Again, you have control over what happens to trust assets. So as you create the trust you’ll need to decide what conditions, if any, to place on when beneficiaries can gain access to those assets.
3. Name Trust Beneficiaries
You’ll need to decide who to name as beneficiaries for the trust. Individuals you might name include:
• Your spouse
• Children
• Siblings
• Other relatives or family members
• Charities or nonprofit organizations
Remember, these are the people who benefit from the trust directly. When naming beneficiaries, you can further specify which trust assets they will or won’t have access to, including IRA funds.
4. Fund the Trust
After creating the trust, you’ll need to fund it. Funding a trust simply means transferring assets into it.
Depending on the type of trust, you might choose to place real estate, land, antiques, collectibles, bank accounts, or investments under the control of the executor. Remember that once assets are transferred to an irrevocable trust you can’t change your mind later.
5. Name the Trust as Your IRA Beneficiary
Once you’ve established the trust and arranged to fund it, the final step is naming it as a beneficiary on your IRA account. Again, that might be as simple as logging in to your brokerage account to update your beneficiary choices. If you’re not sure how to change your IRA beneficiary to a trust, you can reach out to your brokerage for help.
Tax and Withdrawal Rules for Trust IRAs
When IRA money is held inside a trust, withdrawals may be taxable according to the type of trust it is. If money from IRA assets is distributed to beneficiaries of the trust, they’re responsible for paying any taxes due.
That said, in some cases the trust can assume responsibility for paying taxes on distributions, including elective and required minimum distributions, when required.
For example, say you set up a trust to hold your IRA assets, and specify that a beneficiary cannot receive distributions until age 30. In that scenario, the trust could take distributions from the IRA to pay expenses for the beneficiary and pay any tax owed on those distributions.
Qualified distributions from Roth IRAs are always tax free. IRA withdrawal rules dictate that early or non-qualified withdrawals from a traditional or Roth IRA can trigger a 10% tax penalty. Income tax may also be due on early distributions, unless an exception or exclusion applies. Unlike 401(k)s, IRAs do not allow for loans.
Pros and Cons of Putting an IRA in a Trust
If you have a trust already, then naming it as beneficiary of your IRA may not be that difficult. However, it’s important to consider what kind of advantages you may gain by setting up a trust if you don’t have one yet.
On the pro side, putting an IRA in a trust gives you more control over how your heirs use that money. It can also make it easier to create financial security for a special needs beneficiary. It can protect the assets from creditors.
However, it’s important to consider the cost and the level of effort required to set up a trust for an IRA. A trust may not be necessary if you don’t have a lot of other assets or wealth to pass on.
| Pros | Cons |
|---|---|
|
• Allows for greater control of trust assets, including IRA funds. • Can protect assets from creditors. • May make financial planning easier when you have a special needs beneficiary. |
• Setting up a trust for an IRA can be time-consuming and potentially costly. • IRA funds only transfer to the trust once you pass away. • May not be necessary if you have a simple estate. |
The Takeaway
If you have assets in any type of IRA account (traditional, Roth, SEP, or SIMPLE), you can set up a trust so that the assets in the IRA can be transferred to the trust upon your death — and then distributed to beneficiaries according to your wishes.
Just as funding an IRA can help you save for retirement, bequeathing your IRA to a trust can protect your assets and perhaps add to the financial security of the person(s) who later inherits those funds.
Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
What happens to an IRA in a trust?
When an IRA is placed in a trust, what really happens is that the trust becomes the beneficiary of the IRA. After your death, the assets are then managed by a trustee according to the direction of the trust creator. The beneficiaries of the trust can access IRA assets, but only according to the instructions specified by the trust document. Beneficiaries of the trust can include spouses, children, or other family members, as well as charities and nonprofits.
Why put an IRA in a trust?
Naming a trust as the beneficiary of an IRA could be the right move if you’d like to have more control over how your beneficiaries access those assets. You may also set up a trust for an IRA if you have a special needs beneficiary, you want to protect those assets from creditors, or you want all of your estate assets to be held in the same place.
How is an IRA taxed in a trust?
IRA tax rules still apply when assets are held in a trust. The difference is that the trust, not the trust beneficiaries, are responsible for any resulting tax liability associated with earnings from IRA assets. Once the trust distributes income from an IRA to beneficiaries, they become responsible for paying any taxes owed on earnings.
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