Penalty for distributing IRA to a trust

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restingonmylaurels
Posts: 745
Joined: Tue Apr 14, 2015 11:02 am

Penalty for distributing IRA to a trust

Post by restingonmylaurels »

In this thread, viewtopic.php?f=2&t=344346, the financial implications of holding the distributions from tIRAs in different trust types were discussed.

A proponent of keeping funds in trust for beneficiaries, I wanted to look at the tax penalty for accumulation and conduit trusts receiving tIRA distributions, over 10 years. This does not consider other taxes like NIIT or state taxes or taxes on earnings, just federal tax on the distributions.

The assumptions are that the beneficiary of the $1m trust is a single person making a salary of $99k. After standard deduction, this puts them at the top of the 22% bracket, so every additional dollar of ordinary income, like tIRA proceeds, is taxed at 24% and up. The trust tax rate is 37%.

The following, with options 1 (all tIRA distributions go to an accumulation trust), 2 (all tIRA distributions go to a conduit trust and so the beneficiary), and 3 (tIRA distributions go half and half), shows a significant tax penalty for keeping tIRA proceeds in a trust for all but the highest earning beneficiaries.

Code: Select all

Options		1	2	3
Accumulation	1m	0	500k
Conduit		0	1m	500k
Trust tax	370k	0	185k 
Ben tax		0	257k	120k
Total tax	370k	257k	305k
Trust funds	630k	0	315k
Ben funds	0	743k	380k
Total funds	630k	743k	695k
Penalty		113k	0	48k
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David Jay
Posts: 14586
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Penalty for distributing IRA to a trust

Post by David Jay »

That is a clear way to explain the costs, thanks for sharing.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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