My father died unexpectedly and had a sizeable 401k, roughly $450k. He wasn't planning on dying so he didn't list a beneficiary. With no spouse or beneficiaries, the plan requires the money to go to the estate, so it can't be rolled over. It'll be disbursed and treated as ordinary income.
Here's where I'm looking for help making the best decision for my family's inheritance. Bear with me, this is a little complicated. I'm married, filing separately since my wife is doing income-based repayment nearly $200k in student loans that have been growing since she graduated with her doctorate. Our long-term plan with her loans are using the student loan forgiveness program since she's teaching, working for the government. She makes her payments for 10 years and the government promises to pay off her debt.
At her current income, she owes about $100/month. If we filed jointly in the past, my income is counted and her income-based payments will go up to around $1200 per month, but it may go up to even $2400 per month if we file jointly and they see the ordinary income from my dad's 401k disbursement.
Looking at the income brackets and differences between married filing separately and married filing jointly, at my current income I would be looking at about a $25,000 difference between the two different filing types. It looks like, because of the way the loan repayment is structured, we're just stuck going with married filing separately?
I'm doubtful there are any good options here (aside from donating it all to charity) to save on taxes. Anyone have any thoughts on how I can work through this tax situation?
P.S., designate a beneficiary, folks. My dad was methodical about his retirement savings and he wouldn't be happy to see this much going to uncle sam.