Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
A plan for emptying a 401
Old 01-12-2019, 06:08 PM   #1
Dryer sheet aficionado
 
Join Date: May 2011
Location: Richardson TX
Posts: 41
A plan for emptying a 401

My father-in-law is 88 and asked me today what I thought about him pulling money from his 401 and paying the tax so that "you guys dont have to do that when I pass" but I didnt know how to advise him. His health is failing and I dont know that he really needs to be worrying about this, but I said I'd see what I could find on the subject.

He said he was wondering if there wasnt some procedure to draw the money down over the course of say, five years. I told him I think you just request the money from whatever institution he was dealing with and that they'd tax it. Just as long as he's careful not to bump into a higher tax bracket I think theres no magic way of drawing down except to just max out the amount up to the next tax bracket.

Any thoughts?
__________________

rocks911 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-12-2019, 06:15 PM   #2
Thinks s/he gets paid by the post
38Chevy454's Avatar
 
Join Date: Sep 2013
Location: Cincinnati, OH
Posts: 1,943
If you (and others possibly) are the beneficiaries, you just treat as an inherited IRA. You can change the RMD to be based on your age, but must have RMD since original person was over 70.5 years.

It doesn't have to be zero before death. Of course if the money can be useful by all means take it out now when FIL can use it if needed.
__________________

__________________
If you're buying smart water for $4, it's not working

Semi-Retired 7/1/16: working part-time (60%) for now [4/24/17 changed to 80%]
Retired Aug 2, 2017; age 53
38Chevy454 is online now   Reply With Quote
Old 01-12-2019, 06:23 PM   #3
Thinks s/he gets paid by the post
steelyman's Avatar
 
Join Date: Feb 2011
Location: NC Triangle
Posts: 3,511
The simplest (but not best, depending on circumstances) way is to withdraw 1/5th of the balance the first year, 1/4th of the balance the second year and so on until the fifth year when the remaining balance is liquidated.

That’s most likely a terrible approach for a lot of reasons.
__________________

steelyman is offline   Reply With Quote
Old 01-12-2019, 07:07 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 6,855
If he does this, it would make sense to convert it to a Roth, so when it gets passed to you, it can grow tax free. You'll have to take MRDs immediately, but probably a low rate. Any distributions you take from an inherited Roth are tax free.

What is his tax rate vs. his heirs? If he can pay a lower tax on it, or at least some of it, it makes sense for him to pay those taxes. If he'd be paying a higher rate, it makes no sense at all. Same rate, I'd do the conversion since it grows tax free after conversion. So I'd convert up to top of the tax bracket that the heirs are in each remaining year until it is drained.
RunningBum is offline   Reply With Quote
Old 01-12-2019, 11:18 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Sunset's Avatar
 
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
Posts: 6,150
Rather than give it to immediate children, he could give it to grand-children, you would have to read up on it, but I think doing that way makes the withdrawal period very very long. Worth it for big estates.
__________________
Fortune favors the prepared mind. ... Louis Pasteur
Sunset is online now   Reply With Quote
Old 01-13-2019, 07:50 AM   #6
Thinks s/he gets paid by the post
steelyman's Avatar
 
Join Date: Feb 2011
Location: NC Triangle
Posts: 3,511
I believe that an inherited IRA retains its “Roth-ness” once the owner passes away. That is, the beneficiaries can’t convert a traditional to Roth after death. If that route (IIRA) is chosen it would be a good idea to put the paperwork in place in the near future.
__________________

steelyman is offline   Reply With Quote
Old 01-13-2019, 08:01 AM   #7
Thinks s/he gets paid by the post
 
Join Date: Jan 2018
Location: Tampa
Posts: 2,585
Quote:
Originally Posted by steelyman View Post
I believe that an inherited IRA retains its “Roth-ness” once the owner passes away. That is, the beneficiaries can’t convert a traditional to Roth after death. If that route (IIRA) is chosen it would be a good idea to put the paperwork in place in the near future.
True. This is a good strategy.

Quote:
Originally Posted by Sunset View Post
Rather than give it to immediate children, he could give it to grand-children, you would have to read up on it, but I think doing that way makes the withdrawal period very very long. Worth it for big estates.
If not using the above mentioned strategy, then this is another way of doing it, so taxes could be spread out over the lifetime of the grandchildren.
__________________
TGIM
Dtail is online now   Reply With Quote
Old 01-13-2019, 08:10 AM   #8
Thinks s/he gets paid by the post
GalaxyBoy's Avatar
 
Join Date: Jul 2009
Location: The Beautiful Blue Ridge Mountains
Posts: 1,319
Schwab has a good calculator you can use to get an idea of how much your inherited IRA RMDs would be, making some assumptions as to date of death, value of IRA, etc.
__________________
If you push something hard enough, it will fall over — Fudd's First Law of Opposition.
GalaxyBoy is offline   Reply With Quote
Old 01-13-2019, 08:26 AM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 6,855
Quote:
Originally Posted by steelyman View Post
I believe that an inherited IRA retains its “Roth-ness” once the owner passes away. That is, the beneficiaries can’t convert a traditional to Roth after death. If that route (IIRA) is chosen it would be a good idea to put the paperwork in place in the near future.
I don't understand what you are saying. I don't understand what "Roth-neess" is for an inherited IRA even with your "That is" explanation.

I was talking about having the FIL convert to Roth. If he is wanting to pay taxes, it is better to convert than just withdraw. That way heirs get a Roth, which is better than taxable assets going forward, even with inherited Roth MRDs. I think he would need to roll it over to an IRA first, if that's what you meant by paperwork to be put in place.

The question remains as to whether it's better to pay taxes at his rate, or let the heirs pay at their rate.
RunningBum is offline   Reply With Quote
A plan for emptying a 401
Old 01-13-2019, 08:37 AM   #10
Thinks s/he gets paid by the post
steelyman's Avatar
 
Join Date: Feb 2011
Location: NC Triangle
Posts: 3,511
A plan for emptying a 401

Quote:
Originally Posted by RunningBum View Post
I don't understand what you are saying. I don't understand what "Roth-neess" is for an inherited IRA even with your "That is" explanation.

We’re pretty much saying the same thing. My point is that the decision regarding Roth status has to be made while the owner is still alive. If it is a traditional 401k (not clear), paying taxes on the conversion to Roth satisfies the wish to remove the tax burden from beneficiaries. That’s different from trying to do things in the most tax-efficient way.
__________________

steelyman is offline   Reply With Quote
Old 01-13-2019, 08:51 AM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 20,247
Quote:
Originally Posted by rocks911 View Post
My father-in-law is 88 and asked me today what I thought about him pulling money from his 401 and paying the tax so that "you guys dont have to do that when I pass" but I didnt know how to advise him. His health is failing and I dont know that he really needs to be worrying about this, but I said I'd see what I could find on the subject.

He said he was wondering if there wasnt some procedure to draw the money down over the course of say, five years. I told him I think you just request the money from whatever institution he was dealing with and that they'd tax it. Just as long as he's careful not to bump into a higher tax bracket I think theres no magic way of drawing down except to just max out the amount up to the next tax bracket.

Any thoughts?
What is your FIL's tax situation for 2019? What is his marginal tax bracket and taxable income? Also, how much is his 401k? While you don't necessarily need to provide that information to the forum, you'll need to know that to make a good decision.

For example, if he is in the 12% tax bracket RMDs, I would probably leans towards additional discretionary withdrawals to fill up the 12% tax bracket... assuming that his heir's tax brackets are higher. OTOH, if his tax bracket is higher than his heirs, then do nothing.

Alternatively, he could decide that he's willing to pay x% in tax to avoid having his heirs having to pay tax and design withdtrawals such that the incremental tax on those discretionary withdrawals are x%.
__________________

__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...60/35/5 AA
pb4uski is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Help me decide 401-K vs. Roth 401-K wanaberetiree FIRE and Money 22 07-14-2013 03:10 PM
Emptying a House imoldernu Other topics 34 01-30-2013 03:23 PM
Tranfering 401(k) to IRA back to 401(k) dennisbaker Young Dreamers 14 09-23-2009 01:28 PM
Emptying Nest Eggs, Not Nests--NYT haha FIRE and Money 30 07-25-2007 01:37 PM
A different twist on emptying your checking account Nords FIRE and Money 9 05-05-2007 06:58 PM

» Quick Links

 
All times are GMT -6. The time now is 07:02 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2019, vBulletin Solutions, Inc.