Question: My husband and I met recently with our estate-planning attorney who advised us to transfer our assets into our living trust. When we asked our financial institution to transfer our IRA accounts to the trust, they told us they can’t do that. Why not?
Answer: I get this question all the time. It reminds me of the old Meatloaf song – “I Will Do Anything For You – But I Won’t Do That.” I’ll try to explain, in simple, logical English why you can’t do that.
You establish an IRA, or Individual Retirement Account, to save money for retirement -- to augment your other retirement income. IRAs allow you to postpone the income tax on your retirement savings until after you retire. Congress created IRAs for one reason - to encourage you to save for retirement. The main attractions are the tax advantages. In order to prevent taxpayers from abusing the IRAs purpose, they made some rules and created penalties for not following the rules. Those penalties include the 10% penalty for early withdrawal and the 50% penalty for failure to withdraw your IRA funds after you reach age 70 ½ . You can open as many different IRA accounts with as many different custodians as you wish. The only limitation is the $5,500 maximum annual contribution ($6,500 if age 50 or over). The IRS keeps track of your IRA account contributions and withdrawals by your social security number. In their eyes, each individual has one IRA account (even though the assets in the IRA may be spread among different banks, mutual funds, and brokerage firms). Only a person (a human being) can have a social security number, and only a person can own an IRA. All irrevocable and some revocable trusts have tax ID numbers. Tax ID numbers are not the same as social security numbers. The IRS assigns Tax ID numbers, and the Social Security Administration assigns Social Security numbers. A non-person entity, such as a trust or a corporation, does not have a social security number and cannot have an IRA. A married couple can’t have a joint IRA – they each have their own social security number and they each have their own IRA. You can’t own a joint IRA with your children or your friend. The following list of statements summarizes why you can’t transfer your IRA to your living trust.
1. An IRA is an INDIVIDUAL Retirement Account. Only a person (human being) can be an INDIVIDUAL with a social security number. A trust cannot.
2. Only a working individual can contribute to an IRA – a trust cannot.
3. Only an INDIVIDUAL can retire – a trust cannot.
4. Only a person, not a trust, has an age and a life expectancy. You must start taking mandatory distributions when you reach a certain age, and the amount you have to take is, in part, based upon your life expectancy. Penalties for early withdrawal are triggered by your age.
5. Even if you could have your IRA in your living trust, there would be no advantage that I know of. Upon your death, the assets in your IRA will go directly to your beneficiaries without going through probate.
Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning. Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to firstname.lastname@example.org.