26 June 2017

The Ins and Outs of Trusteed IRAs

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A trusteed IRA can help you leave your IRA assets to your children without the concerns of losing the tax advantages available. This type of IRA is a traditional retirement account with some of the estate-planning advantages of a trust that more financial services companies are starting to market to baby boomers.

Trusteed IRAs are for people planning to leave IRAs to their heirs. They are designed to provide a long-term distribution plan for withdrawals. Although such accounts cost more to administer than plain-vanilla IRAs after the original owner's death, they're cheaper than setting up trusts—and less likely to run afoul of tax rules.

Lower Cost Than Trusts 

Some providers recommend a trusteed IRA product for accounts worth at least $2 million since in many cases the assets will be needed during retirement or for a surviving spouse.

One big advantage of the trusteed IRAs: IRA owners can prevent their beneficiaries from spending down the accounts right away. Instead, they can limit their withdrawals to the minimum amount that the Internal Revenue Service requires heirs to take out annually. That way, the remaining investments can continue to grow tax-deferred—or, in Roth accounts, tax-free.

The Risks 

There are some risks to consider when evaluating a trusteed IRA. First, the trust could end up with a higher tax burden since trust tax rates are higher than most indvividuals’ income tax rates. Second, there is a risk that the IRS will not allow the trust to be deemed a “see-through” or “conduit” trust which will disqualify beneficiaries from receiving periodic withdrawals stretched out over a long period.

Click here for the original article in The Wall Street Journal by Kelly Greene.
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