Taxation of IRA Distribution
When a revocable living trust is named as the beneficiary of a traditional IRA, and the trust is qualified for “look through treatment” and becomes irrevocable at the owner,s death, are distributions taxable at the trust’s tax rate or at the trust beneficiaries’ tax rate? The IRA owner is 72 & is taking RMDs. Are the rules for taxation different in this scenario for a Roth IRA?
Permalink Submitted by Alan - IRA critic on Fri, 2015-10-30 18:36
If the trust accumulates the distributions, the trust pays the taxes at the higher trust rates, but if the trustee passes the annual RMDs through to the beneficiaries (RMD based on oldest beneficiary), then they pay the tax at their individual rates. Same for an inherited Roth IRA if the Roth distributes earnings before 5 years from owner’s first Roth contribution.
Permalink Submitted by Roger Fine on Sat, 2015-10-31 00:47
Just to be clear, if the Trustee & the Beneficiary are the same individual, that person would have the option of taking the distribution & paying the tax at his rate or leaving it in the trust and paying at the trust’s rate?
Permalink Submitted by Alan - IRA critic on Sat, 2015-10-31 02:06
Yes, as long as the trust provisions provide both those options. Of course, if the sole beneficiary and the trustee are the same person, not likely anyone would contest any action the trustee takes. Passing distributions through to the beneficiary will almost always result in lower tax bills, but less creditor protection.