Should You Put Your IRA or 401(K) Into Your Trust?
Putting your IRA or 401(k) plan into your living trusts would require retitling your plan into the name of your trust, and this can raise some serious tax issues. Your plan custodian or administrator would almost certainly advise against it because the Internal Revenue Service takes the position that retitling a plan is treated the same as a 100% withdrawal for tax purposes.
How Living Trusts Work
A living trust is a legal entity set up to hold property for eventual distribution to your beneficiaries. You can create one during your lifetime, and it can be either revocable or irrevocable. In either case, you would transfer ownership of your assets and property into the trust's name after it's created. This effectively makes your trust the new, current owner of the assets.
Revocable trusts offer the most flexibility because you can name yourself as trustee, managing the property and income produced by the trust during your lifetime. You can name a successor trustee to take over should you become incapacitated, or upon your death. The successor trustee would then transfer ownership of the trust's assets to your beneficiaries according to your trust documents.
Forming an irrevocable trust requires that you forever give up all control over the assets and property you place into the trust's name. Unlike a revocable trust, which you can dissolve if you see fit, you give up this right when you form an irrevocable trust. You must name someone else as trustee.
Irrevocable trusts are subject to more favorable tax provisions because of these provisions. They can't be "undone."
Moving Your Plan into Your Trust
The IRS has indicated that changing the owner of your IRA or 401(k), even to the name of your trust, is a 100% withdrawal from the account. It's no different from retitling it in the name of your child or other relative rather than naming them as a beneficiary.
You must report the entire value of the account on your tax return in the year you make the change, and it will all be taxed as part of your income on that year's tax return.
You could also be subject to a 10% penalty tax for early withdrawal of the funds if you make the change before you reach age 59½.
Some Other Options
You might want to consider changing the primary and/or secondary beneficiaries on your plan to coincide with your estate-planning goals, rather than changing the actual owner of your IRA or 401(k) from you to your trust. You might want to work with an experienced attorney to accomplish this, however, depending on the size of your IRA or 401(k) and the details of your estate plan.
Consider a Spousal Rollover
Naming your trust as a beneficiary of your retirement funds can also have negative consequences, but there's a way to direct the funds to your spouse while leaving your trust out of the equation.
Your trust can simply deal with your other assets that can easily be retitled without complications.
You can roll the retirement account over to your spouse under special IRS rules, and your spouse can then roll it over to younger heirs at the time of their death. Your heirs would use their dates of birth for required distributions and thus stretch the tax consequences out for many more years, sometimes for generations.
A Final Warning
The Employee Retirement Income Security Act (ERISA) was enacted in 1974 to safeguard retirement plans against misappropriation, ensuring that the money will still be there waiting for you when you retire.
ERISA-qualified retirement plans are subject to a good many interacting and complicated rules, particularly when they're passed as inheritances. Certain actions you might take with them can't later be undone if you realize you've made a mistake, so it's extremely important to get expert advice before you act.
NOTE: The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors.