Can You Put a Roth IRA in a Trust? Key Rules and Considerations

A Roth IRA is a valuable retirement savings tool, offering tax-free growth and withdrawals. Some individuals place their Roth IRA in a trust to control asset distribution or protect beneficiaries. However, this process involves strict rules that must be followed carefully.

Understanding how trusts interact with Roth IRAs is essential before making changes. There are specific legal requirements, tax implications, and administrative complexities involved.

Legal Requirements for Adding a Trust

A trust can be named as a Roth IRA beneficiary, but it must comply with IRS regulations. To qualify for favorable tax treatment, the trust must be a valid legal entity under state law and meet the IRS’s “see-through” requirements. These include having identifiable beneficiaries, being irrevocable upon the account holder’s death, and being properly documented by October 31 of the year following the account holder’s passing.

The type of trust affects how the Roth IRA is managed. A conduit trust requires all distributions to pass directly to beneficiaries, preserving tax advantages. An accumulation trust allows the trustee to retain distributions, but income exceeding $15,200 in 2024 is taxed at the highest federal rate of 37%. Choosing the wrong type of trust can lead to higher taxes and limit the Roth IRA’s benefits.

Proper drafting of the trust document is essential. It must explicitly state that the trust qualifies as a designated beneficiary under IRS rules. If the trust fails to meet these requirements, it may be treated as a non-designated beneficiary, forcing the Roth IRA to be distributed within five years instead of over a longer period. Estate planning attorneys often include provisions to prevent modifications that could disqualify the trust from favorable tax treatment.

Transfer Mechanics and Title Changes

When a trust is named as the beneficiary of a Roth IRA, the account remains in the original owner’s name until their passing. The financial institution managing the IRA must then be notified, and the account is transferred into an inherited Roth IRA titled in the name of the trust. The title must follow IRS guidelines, typically formatted as “[Original Owner’s Name] Roth IRA (Deceased) FBO [Trust Name],” where FBO stands for “For Benefit Of.”

Financial institutions have different policies regarding trust-owned IRAs. Some require additional documentation, such as a copy of the trust agreement or a certification of trust, to verify the trustee’s authority. Not all custodians allow inherited Roth IRAs to be held in trust, so transferring the account to a custodian that permits trust ownership may be necessary. Improper transfers can trigger unintended distributions or administrative complications.

Once the inherited Roth IRA is established in the trust’s name, the trustee manages investments and ensures compliance with IRS regulations. While Roth IRAs are not subject to required minimum distributions (RMDs) during the original owner’s lifetime, beneficiaries—including trusts—must follow distribution timelines based on the trust’s qualification as a designated beneficiary.

Distribution Rules for Trust-Owned Accounts

The timing and structure of distributions depend on the trust’s classification and the relationship between the original account owner and the beneficiaries. Under the SECURE Act, most non-spouse beneficiaries—including trusts—must distribute inherited Roth IRA assets within 10 years of the original owner’s death. This removes the ability to stretch distributions over a beneficiary’s lifetime, reducing long-term tax-free growth.

Exceptions exist for certain beneficiaries, including disabled or chronically ill individuals, minor children of the original account owner (until they reach adulthood), and beneficiaries less than 10 years younger than the deceased. These eligible designated beneficiaries can take distributions based on their life expectancy, allowing for a longer payout period.

The trust document determines whether distributions occur annually or as a lump sum at the end of the 10-year period. While Roth IRA distributions are tax-free if the account has been open for at least five years, delaying withdrawals until the final year could mean missing out on years of tax-free investment growth. Trustees must weigh the benefits of continued compounding against providing beneficiaries with earlier access to funds. If the trust grants discretion, the trustee may time distributions based on beneficiary needs or market conditions.

Roles of Trustees and Beneficiaries

The trustee of a trust holding a Roth IRA has a fiduciary duty to act in the best interests of the beneficiaries while managing the account according to the trust’s terms and financial regulations. This includes overseeing investments, ensuring compliance with trust provisions, and maintaining accurate records. Given the tax-free growth of Roth IRAs, trustees must balance risk and return, selecting investments that align with the trust’s objectives. Poor management could reduce the benefits of the Roth structure and impact the financial security of beneficiaries.

Beneficiaries rely on the trustee for transparency regarding distributions, investment performance, and the overall health of the trust. If the trust grants discretionary distribution authority, beneficiaries may need to communicate their financial needs to the trustee, who must determine whether withdrawals align with the trust’s purpose. Disputes can arise if beneficiaries feel distributions are being withheld unfairly or if they disagree with investment strategies, making clear trust language and proactive communication essential.

Key Tax Obligations

Placing a Roth IRA in a trust introduces tax considerations that differ from individually owned accounts. While Roth IRA distributions are generally tax-free, how the trust handles these distributions affects tax efficiency.

Trusts are subject to compressed tax brackets, meaning income retained within the trust can quickly reach the highest federal tax rate of 37% once taxable income exceeds $15,200 in 2024. If an accumulation trust does not immediately distribute Roth IRA withdrawals, any earnings generated from reinvested distributions could be taxed at these high rates. A conduit trust, by contrast, passes Roth IRA distributions directly to beneficiaries, preserving their tax-free status and avoiding trust-level taxation. Trustees must determine whether retaining funds within the trust aligns with the estate plan or if distributing them to beneficiaries is more tax-efficient.

Estate tax implications must also be considered. While Roth IRAs are not subject to RMDs during the original owner’s lifetime, their full value is included in the account holder’s taxable estate. For estates exceeding the federal exemption amount—$13.61 million in 2024—this could result in estate tax liabilities of up to 40%. Strategies such as gifting or charitable remainder trusts may help reduce these taxes. Trustees and estate planners must coordinate to ensure the Roth IRA’s inclusion in the trust does not increase the estate’s overall tax burden.