Author Topic: Helping My Mom Manage Significant Significant Income/Taxes/401ks  (Read 2994 times)

RusticBohemian

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Hi Guys.

My father just passed away and I'm helping my mom manage her income/taxes/investments. My parents were always savers and lived fairly frugally despite earning a large income, and my father always invested money for retirement, so my mother's retirement will be comfortable.

She'll likely have $48,00 - $55,000 a year in pensions and social security when everything is sorted out. She also has 100k in savings in the bank and a paid-off house, so she has no immediate need of my father's retirement investments, and may never need them, depending on her health or unexpected expenses.

My father left around, $400,000 in five separate 401ks and IRAs (not roth, unfortunately) which I now need to roll over into an account in my mother's name.

She's going to need to start taking disbursements of that money at age 70 & 1/2, which is eight years in the future.

My thought is to simply roll the money into a vanguard targeted retirement account for the year 2023 and let it grow for the time being.

Obviously, when the disbursements start that's going to boost her income and tax brackets substantially. Since my mother may not even need the money, it makes some sense to invest it somehow, but we won't be able to use tax-deferred accounts.

What do you suggest we do with the money when it starts coming out of those 401ks to minimize her tax burden but maximize growth so my brother and I have an inheritance.

Thanks.



 

MDM

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Re: Helping My Mom Manage Significant Significant Income/Taxes/401ks
« Reply #1 on: June 15, 2015, 10:35:26 AM »
I'll preface this by noting that this should all be up to her.  Now, if she is amenable...:

- if her living expenses are completely covered, the investment allocation could be closer to your and your brother's timeline.  E.g., target date 2050 or so instead of 2023.
- if her tax bracket is lower than your and your brother's, she could start doing Roth conversions now (up to whatever appropriate taxable income breakpoint) to minimize the RMD tax bite later.

These (and and other options one might devise) could be done with the idea of maximizing overall family wealth - with the constraint that mom's needs/wants come first.

And I'll end by noting that this should all be up to her.

RusticBohemian

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Re: Helping My Mom Manage Significant Significant Income/Taxes/401ks
« Reply #2 on: June 15, 2015, 10:52:00 AM »
Yes, she's very amenable.




RusticBohemian

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Re: Helping My Mom Manage Significant Significant Income/Taxes/401ks
« Reply #3 on: June 15, 2015, 11:01:31 AM »

- if her tax bracket is lower than your and your brother's, she could start doing Roth conversions now (up to whatever appropriate taxable income breakpoint) to minimize the RMD tax bite later.


- One of us would likely be earning less, one of us earning more. What would we do in this situation?

- Would the conversion be done in small doses every year to keep her tax bracket as low as possible, or in a lump sum?

-



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MDM

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Re: Helping My Mom Manage Significant Significant Income/Taxes/401ks
« Reply #4 on: June 15, 2015, 12:06:51 PM »
- One of us would likely be earning less, one of us earning more. What would we do in this situation?
Maybe "do nothing" is best - it gets very subjective when one tries to decide what is "fair" in that situation.

Quote
- Would the conversion be done in small doses every year to keep her tax bracket as low as possible, or in a lump sum?
Small doses.  May have to be very small (or nonexistent) to keep her in the 15% federal bracket, depending on where in that $48K - $55K range she is, and how much (if any) she has in itemized deductions above the $6300 standard deduction.

Converting a few thousand each year won't make a huge difference between now and when RMDs start.  It's mostly worth doing if and only if she can convert a "large enough" (in the eye of the beholder) fraction of that $400K at favorable terms.


hodedofome

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Re: Helping My Mom Manage Significant Significant Income/Taxes/401ks
« Reply #5 on: June 16, 2015, 10:32:29 AM »
If it was me I'd keep it very simple. The targeted retirement funds are pretty simple. I'd put all the investments in 1 or 2 IRA accounts and just let the taxes be what they are. If your mom doesn't spend like crazy there should still be plenty for you and your brother when the time comes. The minimum distributions will deplete the IRAs but if she doesn't spend all the money, then just stick it right back into a taxable Vanguard account - invested in the same type of funds as the IRAs (but possibly with later dates). Then just take out money from those accounts as needed to pay taxes.

The taxes might suck but it's just the way the world works. You can get pretty complicated and exotic trying to avoid taxes (like buying life insurance or whatever) but I wouldn't tell someone else (that's not really financially savvy) to do it.
« Last Edit: June 16, 2015, 10:41:53 AM by hodedofome »

TomTX

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Re: Helping My Mom Manage Significant Significant Income/Taxes/401ks
« Reply #6 on: June 16, 2015, 03:01:13 PM »
Converting a few thousand each year won't make a huge difference between now and when RMDs start.  It's mostly worth doing if and only if she can convert a "large enough" (in the eye of the beholder) fraction of that $400K at favorable terms.

I have to disagree.  Look at in absolute dollars per time spent, not percentages.

Each thousand you convert in the 15% bracket saves $100 in taxes you would pay in the 25% bracket. After you get up to speed it should not take long to do the conversion each year, "earning" well over $100/hr.

GizmoTX

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Re: Helping My Mom Manage Significant Significant Income/Taxes/401ks
« Reply #7 on: June 16, 2015, 03:35:16 PM »
This money is your Mom's money, not your inheritance. It should be managed for her short and long term care, what ever that may turn out to be. Stuff happens. Her money needs to be accessible to her, with minimal risk to her principal. I would not roll a major portion of her net worth into the stock market.

As she ages, she may need/want to downsize & move into a CCRC (continuing care retirement community); these usually offer independent as well as assisted living apartments & rooms. They usually require a sizable up front investment that is largely refundable when the resident moves out (usually for more intensive care or death). My MIL moved into one of these in her early 90s & she's now 98 -- the social life & support there have greatly aided her longevity & quality of life. The kicker for a CCRC is that a person can't be too sick or infirm to move into one. We're now funding a 24/7 caregiver for her because she needs physical assistance & can't be left alone; we'll be reimbursed out of her CCRC investment when it eventually terminates.

Your mother needs an updated will & POA documents ASAP; chances are your parents left everything to each other. Assuming that she plans to leave some or all to her children, her will should also specify what happens if one of her children dies before her -- does that share then go to that child's legal children? What about future grandchildren? Merely specifying beneficiaries on assets leads to some nasty & unfair results if a beneficiary is already dead.
   

hodedofome

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Re: Helping My Mom Manage Significant Significant Income/Taxes/401ks
« Reply #8 on: June 16, 2015, 04:03:22 PM »
This money is your Mom's money, not your inheritance. It should be managed for her short and long term care, what ever that may turn out to be. Stuff happens. Her money needs to be accessible to her, with minimal risk to her principal. I would not roll a major portion of her net worth into the stock market.


Just nitpicking here but based on her income from pension and SS (which we think covers all her expenses), based on a 4% withdrawal rate $48,000 income is really $1.2 million. So the bulk of her income is taken care of, the $400k in retirement accounts is only 1/4 of her net worth (if you want to look at it that way). She's only 62, she could live till 100. That's 38 years that this money could be invested. Quite a long time horizon. And bonds ain't paying crap.

GizmoTX

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Re: Helping My Mom Manage Significant Significant Income/Taxes/401ks
« Reply #9 on: June 16, 2015, 10:43:23 PM »
Or she could need significant assistance in 5-10 years. I didn't say bonds. She should be diversified & not have everything in one basket. The point is that her timeframe & needs are not the same as a 20 or 30 something.