Inherited 401k Withdraw Strategy

[Blackbeard]

My mom recently passed away and left me $450k 401k.  With the Secure act I now have to deplete the 401k within 10 yrs.  My withdraw strategy thinking so far was essentially to take $45k the first year then $45k +/- interest gained or lost each subsequent year until it depletes.  Is there a better way?

I'm Fired and that will cover all of our living expenses for those 10 years without touching our stache.

Thanks

[dandarc]

Sounds like a good plan to me - maybe someone with more knowledge of the SECURE act can chime in about any specifics there.

You might wait on all or part of the withdrawal for a given year until towards the end of the year, do some draft tax returns to see how various levels of withdrawal impact your taxes. Might want to take a little more to go up to the edge of a tax bracket, for example. Or maybe take less to get in under a limit for a tax credit.

ETA: Sorry for your loss.

[terran]

Sounds like a good plan. You might consider taking larger distributions (depleting it faster) if you also have your own tax deferred accounts that you want to convert to Roth. Your goal should be to keep your taxable income as even as possible throughout your life. Any spikes that push income into a higher tax bracket will increase your overall tax paid. There are exceptions from things like ACA subsidies which might mean you're currently in a higher "tax" bracket than you will be once you're on medicare, so you may want to keep income lower now than you have then (although you'll be getting social security then which will also push income higher). No guarantees, just remember to consider what will happen if you let your tax deferred accounts continue to grow over those 10 years vs depleting the inherited 401(k) faster and/or Roth converting during that time.

[Blackbeard]

Thanks for the great advice.  It’s going to be a bit of a balancing act for me.  I’ve got earned income coming from some board memberships that pay a fee.  This will push me into another tax bracket.  I’m not planning on doing a Roth rollover/ladder I’ve got a sizable taxable account and cash cushion.

Thanks again.

PSA- Make sure your loved ones have living wills, durable power of attorney AND medical power of attorney.   

[Catbert]

If taking out 45K a year will kick you into the next tax bracket *every* year then I suggest considering filling that higher bracket.  I say "consider" because their may be reasons (ACA, FAFSA, etc) for keeping income below a certain level.

I say fill it because a/tax rates have got to go up in the future b/stocks are on sale now c/once stocks are outside the 401k you'll pay lower capital gains tax rates on future gains

[secondcor521]

Check with your CPA, but I believe that a careful reading of the SECURE Act will show that the 10 year period ends on 12/31 of the year which includes the 10 year anniversary of the date of death.

What this means is that if your Mom died this year (2020), then you have until 12/31/2030 to deplete the account to zero.  Which means you actually have 11 tax years, not 10.  So I'd divide that $450K by 11, getting ~$41K.  If your Mom died in 2019, then this doesn't apply - you'd only have until 12/31/2029 in that case.

With regards to earnings, my own strategy will be similar but somewhat different:  I plan to take current balance divided by 11 the first year, then current balance divided by 10 the second year, then current balance divided by 9 the third year, etc.  This would have the effect of spreading the effect of earnings over the remaining years of the term period, producing a smoothing effect.

[Caroline PF]

With regards to earnings, my own strategy will be similar but somewhat different:  I plan to take current balance divided by 11 the first year, then current balance divided by 10 the second year, then current balance divided by 9 the third year, etc.  This would have the effect of spreading the effect of earnings over the remaining years of the term period, producing a smoothing effect.

Yes, this is what I was going to recommend. Divide the total by the number of years remaining, and take that amount as a starting point.

Then, mock up your taxes, and adjust accordingly. Either drop a bit to fit into ACA rules or similar. Or increase to fill up a tax bracket.

Also, you need to consider how to invest it. Using this account as part/all of your conservative investment space will help you to deplete it. I'm not exactly sure how to explain this clearly, but I'll do my best. Say your investment strategy is 70% stocks, 25% bonds, and 5% cash. Invest this account in bonds/cash, and move your other investments to stocks to keep your total accounts as a whole at that investment strategy of 70% stocks.

[Dicey]

You can also look into a Donor Advised Fund if you're interested in charitable giving. It could help you manage your taxable income levels and do some good for a cause or causes you care about.