I was wondering if anyone could offer me some good free advice?
So my wife had a 401K in which she had my kid as the beneficiary. When she passed away 3.5 years ago, the 401K was put into an inherited 401K in my kid’s name at the same financial institution, out of laziness more than anything else, rather than consolidating the proceeds into somewhere else where we would have had more flexibility. Anyhow, my kid is now in college, just turned 18, and now he is about to get an RMD. Now he has no need for the money, our 529s has more than enough to cover him for the next 4 years. My goal, or rather his goal, is to not pay taxes - to see if he could move the entire 401K amount into some IRA or 401K where it would be tax free, but apparently the IRS law is very complicated with this.
Anyone have any brilliant ideas how I can do this? A person suggested that I move the proceeds to an inherited IRA at the same company, but I’m not sure what the difference would be and it sounds like my kid still would need to receive distributions. Help! What to do? Take the distributions every year and move it into a traditional IRA? The limit for this would be $5K/year which isn’t much even with the stretch provision. Cash out everything since he’s in a nothing tax bracket? TIA.
I am certainly not an expert however I have an inherited IRA from my late mother along with both of my daughters, 50% for me and 25% for each of them. My mom died in 2003. Every year we each get a distribution check from the inherited IRA and although taxable income it can either by rolled over into an IRA or money market or in the case of my daughter’s as for them as it is only 25% each, it usually just results in some extra cash at that time of year.
the weird thing is that the inherited 401K is already in my kid’s name. It has been suggested to move it all to an inherited IRA. If he is still forced to take distributions, wouldn’t he just be able to deposit the money back into the IRA? I know there’s a limit on the tax-freeness of the money (for lack of a better word), but this rule of forced distribution just seems silly.
I don’t think this kiddo can make a contribution to an IRA unless he is earning at least the amount he plans to contribute. This kid sounds like he doesn’t have a job.
How much will he get in a required minimum distribution? Will he have a tax liability on the amount he is receiving? If so, like anyone else who takes a distribution, he will have to pay the taxes.
@ProfessorPlum168 I just went through the inherited IRA thing two years ago from my mom. Yes, RMDs are required from the inherited IRA, it is unearned income, no it cannot be converted or rolled over to a ROTH IRA/401k, nor become part of a “regular” IRA, and what one does with the distribution is not limited. If you want to contribute to an IRA “with the RMD”, one has to meet the earned income minimums for contributions, just the same as any other source of cash. So, for example, if it’s a $5,000 annual RMD, kid would have to have earned income of at least $5,000 to contribute the entire amount to their IRA.
One more reason to like ROTHs.
[Just to be clear, there are some special rules for an inherited spousal IRA/401k, but that’s not the case here. Want this to be clear for future readers and others with an inherited spousal IRA.]
Keep the funds in the inherited IRA. Take the RMD each year and enjoy it. There is nothing you can do about the taxes. Since the taxes have been deferred the government eventually wants the revenue. Thus the RMD. These things can’t con on forever. Good luck.
If kid doesn’t need the money, might consider investing the after tax distribution (they’ve paid taxes , if any based on their tax bracket) in a tax deferred or tax free vehicle. If they have earned income, they could reinvest that amount, up to limits, in a Roth and let that grow tax free forever.
I hate to rain on anyone’s parade, but as a formerly licensed rep for 20 years, allow me to point out that it is highly illegal - and unethical - for anyone to give out financial advice unless they are a registered rep and/or licensed financial advisor. @ProfessorPlum168 - you should get in contact with someone that can legally help you with your question.
It is not silly. It is a tax advantaged account. It can’t continue to grow tax free forever. Thus, RMD. One consolation, the RMD amount will be smaller for kids with long life ahead of them. Had you inherited your wife’s yourself, RMD distribution could be delayed until you reach 70.5 or kids inherit it from you. BTW, sorry about your wife. She must have been still young.
While I agree with getting professional advice, according to you, just about anything people say on Bogleheads is highly illegal and unethical. When people gave me advice about selling my house-illegal. Advice about what stocks they think people should buy or avoid-illegal. Advice about avoiding wasting money on lottery tickets and certain stores-illegal. Telling people their opinion on the best thing to do with their money-illegal. Well, I guess the prisons are going to be full, because of those people using their right to freedom of speech, and you have to pay someone in order to be legal. What a racket.$$
Professor Plum, I am terribly sorry for the loss of your wife.
Hogwash. We can give you all the free advice we want, as can your barber. Bogleheads will give you plenty of good advice. We just can’t charge you for it.
Except he won his case against the state of Oregon. They can try to shut you up, but when pressed, they lose. Pathetic that the government even tried to fine him.
“When the case arrived on the state attorney general’s desk, the government lawyers did the only thing that makes sense: they pre-emptively surrendered, returned the money, and apologized to Järlström… They admitted to violating his rights.”
@ProfessorPlum168: Do you have an accountant, or was there an estate attorney involved when your wife passed away? Give him/her a call. I would think you could learn what you need to learn from one phone call.
We’re doing more than that, we’re explaining the law on Inherited IRA’s. (uh-oh, I guess we are now in trouble for violation of ABA rules? )
OP: depending on the amount, your S could consider cashing it all out while in college, pay the taxes at his then tax rate and have a nice tranche of cash going forward. Otherwise RMD’s will be taxed at his (hopefully) higher tax rate once he graduates and gets a job. However, you should do some tax forecasts for to see if it would be worthwhile. (not sure the impact on your taxes if he cashes out say in senior year.)
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