Guidance on Inheriting Spouse's 401k (and other issues)

[googily]

Hi,

I've posted a few times in the past, as DH and I began plotting our future early retirement either this year or next year.

Alas, fate doesn't always play fair, and last year DH was found to have an aggressive cancer, and recently passed away, before we could pull the FIRE trigger. (And to think that we were nervous that RE at 55 and 50 was going to be too soon, and it actually wasn't soon enough.)

We have no children, so a nest egg that was going to be enough for the two of us to live on is of course now going to be more than enough for me.

I'm not making any big plans right now (I'm lucky to be putting one foot in front of the other, let alone much else), but I do want to decide what to do with his $800k 401k. We worked at the same company, and so it would certainly be easy to leave it in the 401k program there, or I could go the Inherited IRA route. Both our 401ks and all of our IRAs and after-tax accounts are at Vanguard.

I have about $300k in after-tax accounts, and my 401k and IRA are currently worth about $600k, and I will have about a $25k pension when I am 65, along with his social security of about $30k. Our house has about $450k in equity, but I don't plan on moving any time soon. I could also see another $500-$700k coming eventually in an inheritance plus sale of a property I own, but am not including those in my plans.

I'm not sure how enthusiastic I'm going to be about continuing to work full-time. I am going to get about $11k a year starting this year from his pension (long story as to why that's coming now). I could probably downshift to part-time hours and make $40-$50k. No real idea of what household expenses are going to be, though I am sure I can cover the non-emergency ones with my current full-time paycheck. I expect to be living a pretty small "footprint" for the next couple of years, until I figure out what the heck I am going to do with myself. And definitely feel no need to leave behind a big box of money for nieces and nephews.

So, I guess the short version is that I want/need access to his 401k money until my retirement money becomes available. Is leaving it in the 401k better, or the inherited IRA?

We do have a CPA who I'll be meeting with soon, but wanted multiple opinions.

Thanks.

 

[OldShooter]

... wanted multiple opinions.

Sorry to hear about your loss.

I suggest talking face-to-face with a couple of financial advisors who offer DFA funds. (https://us.dimensional.com/individuals) You'll get some ideas and if you have to pay a little for the advice it will probably be worth it.

Vanguard has recently begun offering an advisory service that includes some human interaction. (https://investor.vanguard.com/financial-advisor/financial-advice)

There are others too. The subtheme here is passive/index investing. The statistics against using active managers (aka "stock pickers") are overwhelming. Since you're already at Vanguard you probably understand that. A couple of videos: https://famafrench.dimensional.com/videos/is-this-a-good-time-for-active-investing.aspx and https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx

Don't sign with anyone until you have talked to several potential advisors. And make sure that you talk to no one but registered financial advisors. They are, by law, fiduciaries. With the amount of money you have, you should not have to pay more than 75 basis points (0.75%) and you may be able to do better. Advisors' sticker prices are like the sticker prices on cars. A starting point.

Leaving your money in a company 401K is unlikely to be wise because costs tend to be high and choices tend to be limited. Rolling directly from custodian to custodian will not trigger any tax liablity. Your CPA can tell you more about the tax aspects of your planning.

 

[2017ish]

First, condolences. You've experienced the outcome that DW and I dread and fear.

Second, "Don't hurry up, just stand there" for a while. Even though you had a few months to see this coming, your world has been shaken. It sounds like you are proceeding cautiously though.

With respect to the 401k versus IRA question. You would avoid the 10% penalty on early withdrawals from the 401k because of inheriting it. See https://www.irs.gov/taxtopics/tc558.html What employer/plan restrictions might there be on taking withdrawals?

It looks like the same option would apply with inherited IRA transfer (i.e., no penalty). So basically a toss up, depending upon the terms [and investment options/costs] of the employer plan--and assuming no appreciated employer stock in the plan.

______________
E.T.A.--per Datumpoint5's clarification in the next post, I was assuming named beneficiary.

 

[DatumPoint5]

One quick point of clarification. Googily is most likely listed as the "beneficiary". His 401k will be treated with rules of the "beneficiary" and not as an "inherited IRA/401k". In both cases there is NO 10 percent penalty, but, there is a huge difference in how the rules work for a "beneficiary" versus "inherited" when it comes to distributions.

 

[whatnot]

I am so sorry for your loss.
You are right to not make big changes. I am sure that you will be faced with many decisions - but luckily you have time to make them. There are many posters here with so much experience who may be able to guide you during this difficult time.

As 2017ish stated, this is an outcome we all dread and should consider when are debating on OMY.

Will you have health insurance available if you go to part time. If you are 50 - you have 15 years until Medicare and that is a big $$ item of an early retiree budget.

 

[googily]

I am so sorry for your loss.
You are right to not make big changes. I am sure that you will be faced with many decisions - but luckily you have time to make them. There are many posters here with so much experience who may be able to guide you during this difficult time.

As 2017ish stated, this is an outcome we all dread and should consider when are debating on OMY.

Will you have health insurance available if you go to part time. If you are 50 - you have 15 years until Medicare and that is a big $$ item of an early retiree budget.

Thanks, and yes, it is so hard to know that we were so close to what we had been planning for but just weren't given the time. (There's a lot of guilt already for me, that I'm here with the money and he's never going to get to enjoy it.)

My decision on part-time work would be based in large part on health insurance, yes. I think it is very likely that it would be available. Though, after seeing with DH how the best care you can buy can still be nowhere near enough if your body has other ideas, it's a good thing I don't have to decide this minute on whether to pay for health insurance or not, because the answer would be an unpopular one.

And I'd definitely be grateful for any posters who have been widowed to weigh in with general tidbits that might be helpful. DH and I were really really close, and I can't pretend this isn't absolutely devastating, even with time to prepare for it.

On the flip side, we didn't put off doing things we loved doing until RE. We took full advantage of the many advantages we've enjoyed over the years, which is and will always be some consolation. We didn't get to do everything, but we did a whole lot.

 

[Johanson]

I'm so sorry for your loss! I don't have any wisdom to offer you except I agree with others that have said not to make any major changes i.e. going part time right away. The only exception to that would be if you suddenly felt driven to do a bucket list of things now while you're young. I don't know where I would find myself in your position. My 2x ex-wife (and only wife) dying two years ago doesn't remotely compare.

 

[googily]

Sorry to hear about your loss.

I suggest talking face-to-face with a couple of financial advisors who offer DFA funds. (https://us.dimensional.com/individuals) You'll get some ideas and if you have to pay a little for the advice it will probably be worth it.

Vanguard has recently begun offering an advisory service that includes some human interaction. (https://investor.vanguard.com/financial-advisor/financial-advice)

There are others too. The subtheme here is passive/index investing. The statistics against using active managers (aka "stock pickers") are overwhelming. Since you're already at Vanguard you probably understand that. A couple of videos: https://famafrench.dimensional.com/videos/is-this-a-good-time-for-active-investing.aspx and https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx

Don't sign with anyone until you have talked to several potential advisors. And make sure that you talk to no one but registered financial advisors. They are, by law, fiduciaries. With the amount of money you have, you should not have to pay more than 75 basis points (0.75%) and you may be able to do better. Advisors' sticker prices are like the sticker prices on cars. A starting point.

Leaving your money in a company 401K is unlikely to be wise because costs tend to be high and choices tend to be limited. Rolling directly from custodian to custodian will not trigger any tax liablity. Your CPA can tell you more about the tax aspects of your planning.

Thanks on all of this. I'm realizing now I wasn't clear on "what to do with his 401k." I just meant in terms of rollover to an IRA vs. leaving at Vanguard. We spent a lot of time a year or so ago getting all of our investments moved to Vanguard into three-fund lazy portfolios at as much as possible (with my taking the lead on the project), so I feel confident continuing that. Not going to go with any financial advisers.

We do have pretty good Vanguard fund options in our 401ks, at least.

 

[GrayHare]

One quick point of clarification. Googily is most likely listed as the "beneficiary". His 401k will be treated with rules of the "beneficiary" and not as an "inherited IRA/401k". In both cases there is NO 10 percent penalty, but, there is a huge difference in how the rules work for a "beneficiary" versus "inherited" when it comes to distributions.

+1

The beneficiary rules of that 401k may limit your options. Some require the beneficiary to withdraw the funds. As a spouse I believe tax law mandates you have the option to roll withdrawals into a spousal IRA.

 

[akck]

I found this info on your options here - https://www.thebalance.com/inherited-401k-distribution-and-withdrawal-rules-2388269

If You Are Under Age 59 ½

If you inherit a spouse’s 401(k)*plan but you are not yet age 59 ½, consider the pros and cons of the following choices.

1. You can leave the money in the 401(k) plan. With this option, you can take withdrawals as needed and the 10% penalty tax will not apply even if you have not yet reached age 59 1/2. You will still pay regular income tax on any amount withdrawn. (With this choice if your spouse was over age 70 ½, you will be required to continue the required minimum distributions.) The beneficiary designations set up by your spouse would continue to apply at your death.
2. 
   
3. You can roll the funds over to a specific type of account titled as an Inherited IRA. With an Inherited IRA you take required distributions based on your single life expectancy table. You can take out more than this amount, but not less. With this option, withdrawals are not subject to the 10% penalty tax even if you are not yet age 59 1/2. You name your own beneficiaries with this option.
4. 
   
5. You can rollover the 401(k) plan to your own IRA account. There will be no taxes on this transaction. However, if you are not yet age 59 ½, you may not want to do this, because once it becomes your own IRA, any distributions you take will be considered early distributions and subject to a 10% penalty tax as well as regular income taxes. You name your own beneficiaries with this option.

For most people who are not yet age 59 1/2, the best option will be option 1 or 2 above.

As mentioned, if you want access to the funds go with option 1 or 2. One other thing to be aware of is that your tax status will change. The single brackets can be a shocker for taxes compared to a joint return.

 

[FlaGator]

I am sorry that another person has to go through this, and my heart aches for you.

My wife died 3 years ago from pancreatic cancer. Had been married 30 years, did a lot when we were younger and had our kids in our 40's. Like you we had some time after her diagnosis to think about things, but the focus was on treatment and taking care of the kids. There was also hope that the day it would end was a long way off.

When it came to work, I gave it an honest effort after she died, but it became clear my kids needed me more than my employer did and my last day was a year later.

Further to the job, I had kid care and their emotional well-being to attend to, so it was easy to set aside the work. Without them, I think the distraction would have proven helpful - even now I find myself in a periodic funk. Pretty sure it would be worse without the other responsibilities.

As for "tidbits", there was a lot to attend to-selling her car, cell phone, changing registration/ownership on everything from satellite radios, credit cards, other financial accounts, even AAA. The direct mail addressed to her continues today, but I'm now at a point that I can toss it instead of calling the company. Keeping death certificates at hand to deal with all this isn't fun either.

Got advice from a friend along the way that served me well - don't make any decision before you have to. There is a lot that needs to be done, ultimately, but little of it is urgent. Take your time and don't punish yourself if that to-do list doesn't get smaller every day.

More that I can share, and happy to answer any questions either here or PM.

Best of luck to you, and keep your head up.

 

[Hermit]

I have been down the path that is before you and want to offer you my condolences. It will certainly take time to get where you feel like doing a lot of planning. I did the "one foot in front of the other" thing for quite a while. Time does heal, so give yourself as much time as you need.

One quick point of clarification. Googily is most likely listed as the "beneficiary". His 401k will be treated with rules of the "beneficiary" and not as an "inherited IRA/401k". In both cases there is NO 10 percent penalty, but, there is a huge difference in how the rules work for a "beneficiary" versus "inherited" when it comes to distributions.

I'm pretty sure I was listed as beneficiary on DWs 401k. I don't think they normally have a different kind of designation. DW's 401K was rolled into a Vanguard inherited IRA. You have to talk to the folks at Vanguard and DH's 401k people to make sure it gets transferred with the correct nomenclature on the account. With the currently active thread about the Supreme court saying an inherited IRA is not as protected as your own IRA this may be an area to look into before you make this decision. In my case, DW was 10.5 years younger than me so for me it made most sense to put it in an inherited IRA where it could grow tax free for an additional 11 years.

 

[googily]

I am sorry that another person has to go through this, and my heart aches for you.

Thanks so much for all of your thoughts, and I'm so very sorry you had to go through this.

I do think that work is a decent enough distraction for now--they expect very little of me, and it gets me out of the house and talking to human beings, not just cats. But we'll see.

{and Go Gators!}