Hi, I hope this is the right subreddit. I just got told this today and I know absolutely NOTHING about 401ks – for context, my dad passed when I was 15 (covid) and I’m 20(M). We couldn’t access the 401k until 5 years passed, so I’ll be receiving it this September or so via my uncle who is over my mother’s estate (she passed 2 weeks after he did due to covid too, but that’s just to provide context).
My concern lies in that my grandmother did not tell me how much it will be. She only said that I’ll be taxed $30k. My dad worked at Toyota and made a great income – he worked there for I believe 15 years. He made up to $90k/year, but idk if that was the entire 15 or just the latter half of it.
Maybe she doesn’t know, or does, but I don’t feel comfortable asking her right now. We’re having to sort out other financial affairs regarding other inheritance points from my dad for my college education, so the last thing I want to do is pry her for more information.
Does anyone have any idea?
Other context: I’m in the U.S. and live in AL. Have always lived here, and I am a birth resident- same as my parents.
I’m going to be given my deceased father’s 401k later this year – I have questions
byu/MysteriousTraveler88 inpersonalfinance
Posted by MysteriousTraveler88
15 Comments
It doesn’t really matter just wait until September to find out. The smart play is to keep in invested and start your retirement savings off right.
Just don’t do anything at all until you understand stuff better. Just let it sit. A 401k is fine just sitting for a while. There are tax implications and whatnot if you sell or withdraw. So fully understand the situation first before you do anything.
Be cautious if anyone says that you need to go ahead and do this or that with it. Especially if they say that you need to do it quickly.
You’re going to inherit a significant amount. You should talk to a lawyer and/or CPA to review the inheritance (maybe it’s more than just the 401k, maybe he had stocks in the company). You’ll want to minimize the tax hit as much as possible. Your grandmother might not have been forthright about the money because of your age. But, now that you are older, you should learn to manage your money, how to deal with taxes and how to invest. I would talk to a professional about it. Check if your parents had a trust and will.
Typically a non spouse inherited 401k has to be emptied by year 10 after the year the principal dies. Since you were a minor the clock is delayed. I thought till 18 but maybe 20 as you said. Either way you either have 8 or 10 years to distribute the 401k to yourself. You’ll pay taxes on what you take out. Most people take it out gradually to spread out the hit. If you are in a relatively low tax bracket like 12% marginal you may want to take out up to the top of the bracket. Smart play would be to reinvest it after distribution into a Roth IRA and never pay taxes on that money again.
You should ask your grandma/uncle if there is an estate attorney they are working with to handle your parents’ affairs so that you can ask them questions about taxes.
One hiccup is that for people who died after January 1, 2020, non-spouse beneficiaries (like you) must drain the account in 10 years. You can decide how much to take out per year, but you will pay taxes on it. The money counts like extra income on top of whatever you earned that year.
If you have a job with a 401k, it would be best for you to max your own 401k to reduce your taxable income. If you’re still in college, it would be best to minimally withdraw from it until after graduating to maximize your financial aid.
If your dad died in 2019, the rules are different.
I also don’t know why you had to wait until age 20 to gain access. There is probably some kind of trust involved which could further complicate things.
These are all best answered by the estate attorney. They can also tell you how much you stand to inherit, although it doesn’t really matter.
Don’t touch it (unless it’s not invested or invested in something trash) until your brain develops mid 20s, you’ll make the smartest choice then.
Curious, what was the reasoning behind making them drain the account in 10 years??
Don’t listen to grandma. No disrespect, but you need to speak to a lawyer and a CPA.
Not financial advice: You MIGHT be required to pay 30k if you emptied the account lump sum, but you could pay much less if you disbursed slowly over 8 years. MUCH less.
Dude that stinks.
I don’t know your situation right now but if you have access to financial planner through any kind of support network… it might be a good idea to talk with one. They can give you way more and better info than I can.
I’m not an expert but I’ll napkin math some stuff, others can chime in if I’m off base.
But some of the taxes part will also depend on your current income/ relationship situation.
If the $30k estimate is based off a immediate and full disbursement of just traditional (non Roth) 401k balances you’re probably looking at around $130k traditional portion. I believe any Roth 401k portions that he may or may not have passed to you will be tax free.
You likely can have it all rolled into an inherited IRA accounts and spread the withdrawal and tax hits over multiple years (probably 4-5 more years to hit the “10 year rule”)… And if the “30k taxes” estimate already assumes multiple annual disbursements over the next 4-4 years you could potentially expect a much higher balance.
If you currently or expect to rely on ACA and other income-based services for medical care/support… the ability to structure the withdrawals over those multiple years may quite important and a bigger reason to talk with a specialist.
When I dealt with my sister’s 401k, the taxes were 10%. So guesstimating that $100k
Like someone else said, you have 10 years to withdraw the money.
The big issue is that the withdrawals are *taxed to you as ordinary income*. That is the same as if you had a job that paid you that. That could put you in a much higher tax bracket.
If you already have an IRA or Roth, start with them.
Questions to ask:
– can you roll the distributor straight to your IRA tax free just like if it was your 401k and you were changing jobs.
– if you choose not to roll, or you cannot roll, ask if the 59 1/2 rule applies. If it does, you will likely hand 10% to the feds as an early withdrawal penalty.
– if you are not rolling, how will the administrator handle tax withholding?
– will the administrator allow you to simply convert the 401k to an IRA or personal 401k and keep it at that institution?
If you can get the estate administrator to give you specifics and contact information, you can call the administrator directly to ask all these questions.
Your grandmother should have no knowledge of how much tax you’ll owe. You have the ability to pay the tax slowly over 8 to 10 years. I’m also a little confused, I’m sure it’s because you were a minor, what your uncle’s part in it is. Distributing retirement account does not require an executor. It’s not part of probate.
Thinking about a little bit more, your mom was probably the beneficiary and then she died quickly thereafter. Perhaps leaving no named beneficiary. In that case I suppose it would default to you but will require an executor. Hell, I don’t know.
In any case, you have options. Get the beneficiary IRA setup in your name, find someone you trust, and get some education.
If you can find a CFP that does some pro bono work, that would be a great place to start. The CFP board does encourage a certain amount of pro bono hours per year.
My Dad died in 2020 and I handled his probate. I am not accusing your Uncle of anything but it doesn’t make sense to me that he is telling you the 401k wasn’t accessible for 5 years…we settled my Dad’s accounts in about a year and the money was transferred to inherited IRAs for my brother and I.
As mentioned, you are going to have to withdraw the money within 10 years of your Dad’s passing. Now that 5 years have passed, you will only have 5 years to withdraw the funds. If his 401k funds are “traditional” that means they havent been taxed yet. You will be taxed on the funds and they will be treated like income. If the 401k funds are “roth” that means they have already been taxed. You will not owe any taxes on those funds. There could also be a mix of “traditional” and “roth”…youll find out when you get the money.
My recommendation would be to draw 1/5th of the “traditional” money each year to minimize your tax bracket.
Everyone’s finances are different but I would recommend that you withdraw the money and re-invest it into a roth IRA (if you are eligible) or a brokerage account. Or both.
As I said, not accusing your uncle of any wrongdoing but you might want to consult a professional to make sure that nothing shady has been going on and there are no funds missing.
So I would call the company he worked for and ask who the 401k is with ( fidelity , empower , prudential etc ) and then call that company , and inquire about plan stipulations and rules for beneficiaries.
If you withdraw from it you are taxed like 20% federal and state ( if applicable to your state ) since it’s a beneficiary account you *may* be except from the early withdrawal penalty ( you will want to confirm with a tax advisor or an accountant )
You may be able to leave it where it’s at but you will want to confirm with the financial institution it is held with.
The 30k tax I assume is if you cash it immediately. You can roll that into an inherited IRA.
You will eventually have to pay tax, but you may be able to offset some of those taxes say if you increase your contributions to your own retirement accounts. My guess is it’s about 150k based on the uncle’s idea of how much tax.
Her saying you will be taxed $30k makes me really nervous. As others have said you have to empty the account within 10 years, and everything you withdraw will be taxed as income, but you don’t have to withdraw a penny until year 10 if you don’t want to. So how much tax you owe can vary wildly and will also be based on your current income. You need to make sure it stays in the 401k or gets directly rolled over into your own IRA account while you talk to an accountant and a financial advisor.