My husband and I discovered MMM about six months ago and we have made some major life changes, so that's a plus. Still, we've got a long way to go. It's my first time writing in the forums, and unfortunately it's under sad circumstances.
My aunt passed away suddenly five years ago, and I inherited part of her 401k. Over the past 5 years, it grew to $35,000. Just recently I got a call that I would need to withdraw the money by December 31. I didn't do my "homework," so to speak, when I inherited the 401k (partly out of shock of what happened to my aunt and partly because I hadn't seen the MMM light), so now I am trying to wrap my head around my options.
I've called the company's retirement services number several times to get some clarifications, and they've said that I'll need to withdraw the lump sum and they will withhold 20% for taxes. The last time I called, however, a representative said that they could actually roll all of it into an inherited IRA for me, and then I would just have to start taking the required minimum distribution each year (so this would be the "life expectancy stretch method," if I have that right). The catch, he said, is that if I am audited I would have to pay penalty fees for not taking my RMD in the four prior years.
So my question is: Is it better to take the lump sum with the 20% taxes now, so I don't have to worry about the penalty fee potential? Or is the penalty fee (if I do get audited) not that big of a deal, considering the long term benefits of rolling over to an inherited IRA? I'd love to know any thoughts as I am sufficiently confused after my last call.
Here's a bit more about me:
Age: 32
Salary: 66,000
Assets:
401k: 30,000
Inherited 401k: 35,000
Roth IRA: 6,000 (I have not contributed anything to this account this year)
Liabilities:
44,000 student loan at 4% interest (this is after refinancing)
*I have no other debts
(My husband makes 95,000 and this year we each put 15% of our salaries into our 401ks.)
*Before I knew about the inherited ira roll-over option, my plan with the lump sum was to put 5,500 into my roth, bump up my 401k contributions for the end of the year, and put the rest toward my student loan.