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Drawing Down IRAs & 401(k)

I've retired to Florida and have a lot in IRAs & a 401(k). My Pension & Social Security cover all my normal expenses, medical and even the vacations I take. At this rate, I will leave a substantial inheritance to my children who live in states that will tax inherited IRAs & 401(k)s (in addition to the Feds) after I die. But it will be less than the Federal Inheritance Tax limits.

 

My strategy is to start slowly withdrawing money from the IRAs & 401(k) and pay the 22% Federal income taxes (0% State), and move the money into post-tax investments. How I wish they had Roth 401(k)s in my company when I was hired. When I die, they'll inherit the cash & investment accounts (no income taxes until they sell the investments).

 

I plan to do this because when I die, the inheritance will put my children in a much higher tax brackets since they will be in their peak earning years. I'd see them paying 32% Federal and 5-6% in state taxes (total 37-38% tax hit).

 

I know I risk losing anything not in a retirement account should I be sued, but that is unlikely.

If I need the money I will have it available too. I am not gifting at this time.

 

Has anyone else thought of doing this to save heirs from being whacked with huge tax liabilties?

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Regular Social Butterfly

I am of the opinion that our gutless leadership will NOT raise income taxes on mass America. Sure, they have NO problem picking on those rare few above $400k or corporations or taxing the HUGE deferred income balances. Secure Act specifically targeted that huge pool and expects to accelerate the taxation, revenue stream.  

In the interim I am awaiting someone to find a loophole to Secure Act so I can pass IRA balances to my children, who too, will be in the peak earning years and wouldn't be thrilled to see their inheritances go to a wasteful, foolish government that is increasingly socialist. 

I suspect our self serving Congressional leadership will CREATE a loophole so they, too, can pass their wealth.  I just need to hopefully piggyback

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Regular Contributor

Hi,

I wouldn't give up yet.  It still may be worth it to convert IRA to a Backdoor Roth IRA and probably should be done incrementally so as to minimize your own tax liability to accomplish this.

 

https://www.nerdwallet.com/blog/investing/backdoor-roth-ira-high-income-how-to-guide/

 

https://www.bogleheads.org/forum/viewtopic.php?t=271470

 

The new Secure Act, removes the stretch option over your heirs lifetime to 10 year limit.

Instead, they must empty accounts out 100% or be penalized 50% on any amount remaining.

Still, heirs cashing in a Roth will be a tax-free event.  Cash could be used, by them, to convert their own 401(K) to Roth IRA and/or delay Social Security (currently, 8% per yr. income increase of benefit)

 

You might consider contacting a tax professional but I would explore Backdoor Roth IRA  first, to see if it is right for you and getting out of paying someone.

 

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Honored Social Butterfly

@prive40 

 

Saving your beneficiaries some taxes is a good thing as long as you can afford it and it does not harm you financially.

 

Before giving you my comments - there are a few caveats that might need to be mentioned.  I did this but it was several years ago - I converted much of my Traditional IRA / SEPP-IRA to ROTH-IRA but I did it incrementally while watching the tax consequences and any other $$$ consequences.

 

You said:  " But it will be less than the Federal Inheritance Tax limits.". . . . . .

Caveat:   Just wanted to add:  Right now but you will need to make sure that you stay up on any changes in the law - never know in this political climate what might happen - government needs money, ya' know.

 

You said:  " When I die, they'll inherit the cash & investment accounts (no income taxes until they sell the investments)."

Caveat:   I understand this to mean your normal investment, outside of any deemed Retirement Account,  cash or investment accounts - AGAIN, you will have to make sure that the law does not change. 

 

I am going to assume that your beneficiaries are all NON-spousal benficiaries.

Your decision, based on the tax consequences to these NON-spousal heirs, is a good one most likely.  As long as you can pay the subsequent income taxes and

( Caveat: )  any other possible higher income reporting situations.  The one I can think of right off the top of my head is the Medicare IRMMA (Income Related Medicare Monthly Adjustment Amount )

Medicare.gov - Part B Cost for Higher Income Beneficiaries 

OR CAVEAT:  any other deductions you might lose on your income taxes because of a higher reported income.

 

Remember, if you are of the age where RMD's from your tax-deferred retirement accounts are due (72 years old beginning in 2020; 70.5 years old prior to 2020), any conversion amount has to be an amount OVER the RMD. Amounts that must be distributed (required minimum distributions) during a particular year aren't eligible for rollover treatment.

 

The SECURE ACT passed and signed in December 2019 affects the way that NON-spousal beneficiaries have to receive distribution from either a Trad. IRA or a ROTH and IRS Publ. 590-A and Publ 590-B have yet to be completely brought up to speed.  There will be more changes effective for tax year 2020.  Best to review both of these before any action and understand what changes are coming in 2020..

 

IRS Publication 590 - A 2019 Contributions to Individual Retirement Arrangements 

 

IRS Publication 590-B 2019 - Distributions from Individual Retirement Arrangements 

 

and an article that highlights these changes:

Investopedia: 01/21/2020 - Roth IRA Required Minimum Distribution (RMD)  

 

Good Luck -

 

It's Always Something . . . . Roseanna Roseannadanna
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