Author Topic: Help with dad's 401k!  (Read 2399 times)

Grateful Stache

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Help with dad's 401k!
« on: March 22, 2014, 08:41:11 AM »

My dad is turning 70 soon, and he has not made any moves with his 401k (no IRA/Roth conversion, etc.). As you may well know, he will be forced to take the required minimum distribution (RMD) at age 70.5, which is the worst possible outcome since it will be taxed as ordinary income and it will be money he doesnít need.

What do you think the best strategy is at this point? Since he has a history of ďnot wanting to deal with it,Ē I think the best move would be to transfer the money in one chunk into a Roth. Of course, the tax bill will be huge, but at least he will have lower fees, no RMDs, and a tax-free source of income to either use or pass down to his kids.

Other info: He has a pension, so thatís why he hasnít touched his 401k. Iím not sure what the balance is, but I imagine itís in the low to mid six figures.


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Re: Help with dad's 401k!
« Reply #1 on: March 22, 2014, 09:29:56 AM »
I would get help from a CPA or Financial Adviser to understand which option is best.   

Cheddar Stacker

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Re: Help with dad's 401k!
« Reply #2 on: March 22, 2014, 10:43:01 AM »
I would do some better tax planning than that. Take his 2012 and 2013 tax returns and figure out the sweet spot. If his total income from social security and pension put him at $50K taxable income, then $23K from the IRA would put him at the top of the 15% bracket (single filing status) or $97K from the IRA would put him at the top of the 25% bracket. If he's married, use MFJ tables to get your numbers.

You could likely deplete the account in 3-10 years (depending on how large it is, and the rest of his tax situation) without paying a tax rate higher than 15-25%. There's no real benefit to paying 33-39.6% tax on the balance if you don't have to, other than simplicity, but I think an annual look at this for 3-10 years is worth an 8-25% tax savings. In addition to everything I mentioned above, we now have to deal with the medicare tax on income > $250K due to the AFA. I'm not sure exactly how retirement distributions fit into that new tax if at all, but it's not good to get your AGI above $250K for many, many reasons.

Good luck!


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Re: Help with dad's 401k!
« Reply #3 on: March 22, 2014, 11:26:08 AM »
What about a "stretch IRA".  I believe the way it works is both you and your dad would be beneficiaries or owners and the rmd would calculate an average of your ages - so since you are younger it would be a smaller rmd and allow the IRA to stretch over a longer period of time tax free.  I agree that you should talk to a specialist, though

Cpa Cat

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Re: Help with dad's 401k!
« Reply #4 on: March 22, 2014, 01:06:48 PM »
I would NOT take it out in one lump sum. Paying the tax over his remaining lifetime is likely a much better mathematical deal than paying it this year.

If he really doesn't need the money, you could have him take out the minimum required and leave as much as possible in there for his estate tax exemption to eat up. Depending on the size of his estate, the remaining balance in a 401k can also become a tax-free asset for his children when he dies.

Do not make any hasty decisions here - there are a lot of tax factors to consider, including estate planning issues. Get ye to an accounting firm.

Grateful Stache

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Re: Help with dad's 401k!
« Reply #5 on: March 23, 2014, 11:11:44 AM »
OK, lots of great advice, folks. We'll investigate some of these options. I wish he was a little more interested in the process, but we know that waiting to take the RMD would be the worst choice.

Thank you!
« Last Edit: March 23, 2014, 11:20:28 AM by Grateful Stache »