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Why you shouldn’t put your retirement account in a trust

On Behalf of | Jun 13, 2019 | Trusts

You can put a lot of different assets into a trust. People often consider simply putting in financial assets, but you can also add real estate and things of this nature.

While doing estate planning, people sometimes ask if they should add their qualified retirement accounts to the trust. These could include qualified annuities, IRAs, 403(b)s and the ever-popular 401(k)s. If you’re thinking of setting up a revocable living trust, though, you do not want to add these accounts. Here’s why.

First off, you don’t need to. You can just make the trust the beneficiary on the retirement account, rather than an heir. If the account pays out to someone other than yourself, it pays into the trust and funds it at that time. The trust can then distribute the money as you intended.

Secondly, doing it early means that you essentially perform a complete fund withdrawal on the account. You take everything out and put it into the trust instead. Not only did you not need to do that yet, but it means that you would have to pay income tax on 100 percent of the account value that very same year. That’s also not what you intended to do, so changing the beneficiary is simply an easier and better way to accomplish the same thing without the early, unintended consequences.

As you can see, it’s not hard to make some serious financial mistakes when setting up a trust. To avoid these, make sure you understand exactly how the trust works and what steps you should take when creating it.


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