Author Topic: Inherited employer 401(k) - roth or traditional?  (Read 831 times)

nurseart

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Inherited employer 401(k) - roth or traditional?
« on: May 27, 2018, 02:15:31 PM »
Hello,

My father in law recently passed away and I'm helping my husband figure out how to handle his inherited employer 401(k) in the amount of ~90k. My understanding is unlike other types of accounts, he can choose to place the funds either in a roth or traditional inherited ira. This was also stated on the paperwork we received today. I understand either option would require RMDs. I anticipate this being a high-income year for us but we will stay in the 24% tax bracket regardless of how the inheritance is handled.

We are in our early 30s with aspirations of FIRE in the next 10 years. This account would be a useful way to access funds before some of our other retirement accounts are accessible to supplement income from our rentals.

What are your thoughts on opening a Roth or traditional inherited IRA? I'm considering using Vanguard for the account.

MDM

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Re: Inherited employer 401(k) - roth or traditional?
« Reply #1 on: May 27, 2018, 02:20:46 PM »
...he can choose to place the funds either in a roth or traditional inherited ira.
...
What are your thoughts on opening a Roth or traditional inherited IRA? I'm considering using Vanguard for the account.
I would put the funds into the same type of IRA as they were in the 401k.

Putting Roth 401k funds into a traditional IRA makes no sense at all, while putting traditional 401k funds into a Roth IRA will incur tax on that amount this year.

Frankies Girl

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Re: Inherited employer 401(k) - roth or traditional?
« Reply #2 on: May 27, 2018, 02:44:12 PM »
If you tried to turn a regular (tax deferred) inherited 401K into a Roth? You'd pay how ever much taxes that amount ($90K?) depending on your taxable bracket. If you're already in a high taxable bracket, you'd end up having to declare all that 401k as part of your taxable income for that year, and lose a large chunk of it to taxes - so doesn't sound like a great move if you're trying to keep as much money in your pocket as possible.

There are ways to move smaller chunks over called a Roth ladder from a traditional (rollover), but it's something you'd need to do your homework on to make sure you do it in the most tax efficient manner.

RMDs are not going to be terribly large due to your husband's age and the size of the IRA (likely under $3K per year), so the taxes owed won't be anything as much as converting the whole thing in one year. You should probably look into converting it to a traditional (inherited) IRA, set up the RMDs and then figure out how much you can pull out to do a backdoor Roth conversion each year (if you're eligible - your income or tax laws may have changed to mess with this handy move).

https://www.marketwatch.com/story/should-i-convert-an-inherited-retirement-account-to-a-roth-2017-09-11

The only thing you absolutely must jump on is making sure that whatever account you decide to turn it into, it is labeled correctly as an INHERITED account so they don't force you to take all of it out in a 5 year period. The inherited IRA account is a pretty decent account even with the RMD as you have no penalties for taking whatever amounts you'd like - you could take the minimum, or you could take 10, 20 whatever... as long as you pay the taxes owed if it is a traditional IRA.

And finally - wanted to say I'm so sorry for your family's loss.
« Last Edit: May 27, 2018, 02:46:22 PM by Frankies Girl »

nurseart

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Re: Inherited employer 401(k) - roth or traditional?
« Reply #3 on: May 27, 2018, 02:49:01 PM »
Thank you both for the feedback, we will do the traditional.

secondcor521

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Re: Inherited employer 401(k) - roth or traditional?
« Reply #4 on: May 27, 2018, 05:38:10 PM »
The only thing you absolutely must jump on is making sure that whatever account you decide to turn it into, it is labeled correctly as an INHERITED account so they don't force you to take all of it out in a 5 year period. The inherited IRA account is a pretty decent account even with the RMD as you have no penalties for taking whatever amounts you'd like - you could take the minimum, or you could take 10, 20 whatever... as long as you pay the taxes owed if it is a traditional IRA.

And finally - wanted to say I'm so sorry for your family's loss.

Titling the IRA is one requirement to do a stretch IRA.  There are others, including the timing and manner of transferring the original IRA into the inherited IRA.  See here for a list of seven mistakes to avoid:

https://www.forbes.com/sites/advisor/2011/06/28/7-mistakes-with-stretch-iras/#2c2e6e6e1d10

Titling is mistake #1 and timely transfer is mistake #3.  #2 is also technically important because you could lose the stretch option if the transfer isn't done correctly.

I add my condolences.