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quick question - taxes on inherited retirement money

JayJay Senior MemberPosts: 4,119 Senior Member
Still working on my dad's estate stuff. The question here is, for those who might know and/or have experience; Dad had a little retirement savings plan with a former employer. It's really not much. Around 36K right now. That will be split between me and my sister, so I'm specifically dealing with about 18K or so.

I do know that if I draw this money, there will be taxes on it. Federal and State, in my case. I also know that there will be no penalties aside from that.  Just taxes.  If I draw the money, they will tax it at 20% for fed plus whatever my state tax is, which I  believe is 4.9%. Otherwise, to avoid the taxes, I would have to roll it into another retirement account. To me, it's not enough money to worry about rolling into retirement. I have my own retirement plan and will be retiring in about 4 years and starting my second career.  So, I'm thinking I'm just going to draw the money and pay the taxes on it.  My questions are, is there anything I'm missing, should I have more than the standard 20% withheld for taxes or just set some extra money aside in case I end up owing more in taxes next year?  At this point, at the standard tax rate, it looks like I would be paying somewhere around $4000 total in fed and state taxes if I draw it. I'm kinda thinking about drawing it with the standard tax deductions, then go to my credit union and start a little (5K) 6 month CD or money market to set aside just in case I end up having to pay more in taxes next year.

Once I get the estate all settled, I'm planning on getting a new house and a shop built on my place. So any cash I can get my hands on is being saved to go toward that.  It seems to me this little bit of money would be better invested in my property than in a retirement account, even though I'll have to pay the taxes on it..

Your thoughts?

Replies

  • earlyagainearlyagain Posts: 7,833 Senior Member
    No knowledge.
    No experience.

    I always plan on 35%
    If its less, thats ok, better than unexpected hits later.
  • JayhawkerJayhawker Moderator Posts: 17,664 Senior Member
    I would chat with a lawyer who specializes in that stiff...there are loopholes...
    Sharps Model 1874 - "The rifle that made the west safe for Winchester"
  • JKPJKP Senior Member Posts: 2,413 Senior Member
    Can you offer a bit more details? Is it a 401k or IRA where you are one of the designated beneficiaries?
  • breamfisherbreamfisher Senior Member Posts: 13,702 Senior Member
    Jayhawker said:
    I would chat with a lawyer who specializes in that stiff...there are loopholes...
    Lawyer, accountant, or financial advisor. 
    Overkill is underrated.
  • JayJay Senior Member Posts: 4,119 Senior Member
    JKP said:
    Can you offer a bit more details? Is it a 401k or IRA where you are one of the designated beneficiaries?
    I thought about that after I posted and didn’t take the time to clarify. My bad. It’s a 401k. Me and my sister are the beneficiaries. Like I mentioned before, they tell me there’s about 36k in there. So about 18k each. He had another pension account, but come to find out, his ex wife drew it all in 2010. That’s a whole other story.... 

    From what I’ve got so far, I have to draw this money within 10 years. My options seem to be roll it to my own retirement account or draw it. 
  • Diver43Diver43 Senior Member Posts: 11,748 Senior Member
    You definitely need to talk to a money person accounted, tax attorney that type 
    Your Dad worked for what he left his kids.  No need to give the Government more money to give to someone else 
    Logistics cannot win a war, but its absence or inadequacy can cause defeat. FM100-5
  • JKPJKP Senior Member Posts: 2,413 Senior Member
    This is a bit lengthy, but comprehensive and accurate:

    https://www.schwab.com/ira/inherited-ira/withdrawal-rules

    What you said about the 20% federal tax isn't accurate. Any distribution of funds from your soon to be established inherited IRA account will be treated as income. Not really any different than any other income. 

    So, you could be taxed 20%, or 30%, or 37%...it depends on how much overall income you have each year you distribute funds. 

    Let's say you're married and you and your spouse will already earn $200,000 in 2021. If you distribute some or all of the inherited IRA funds you'd be in the 24% bracket for that income. 


    Make sense?

  • JKPJKP Senior Member Posts: 2,413 Senior Member
    edited June 26 #9
    Since it's a 401(k) you and your sister may need to be somewhat on the same page. The company managing the 401(k) should be able to give you free advice on that. 

    The rules are a bit different with 401(k) accounts. 
  • JKPJKP Senior Member Posts: 2,413 Senior Member
    And here's a good read on inherited 401ks which is directly applicable to your situation. The new Rule of 10 applies. 

  • knitepoetknitepoet Senior Member Posts: 22,374 Senior Member
    edited June 28 #11
    I have no clue, other than to echo the suggestion of speaking with a CPA/lawyer etc.

    Concerning the state, it varies by state. I know in Alabama, if you get income like that, and don't pay "estimated tax" on it the quarter you get it, they tack on a penalty ($5 here)
    In your state they may not, or it might be a BUNCH more?????????
    Seven Habits of Highly Effective Pirates, Rule #37: There is no “overkill”. There is only “open fire” and “I need to reload”.


  • JayJay Senior Member Posts: 4,119 Senior Member
    Thanks for all the input guys. I was too busy over the weekend to get on here. I'll go through the links and look for a financial person to speak with. A close friend's father is a retired financial guy. I'll see if I can reach out to him and maybe get some advice on where to go from here, along with the other info you guys have provided. 
  • VarmintmistVarmintmist Senior Member Posts: 7,673 Senior Member
    edited June 30 #13
    Just did this.
    You can draw it and get taxed at your rate and probably the state grave robber tax, or put it in a inherited IRA where at this time you will have to start taking distributions. Under the laws (Secure act) that went into effect recently, you will have to take it out in less than 10 years. So figure a distribution of about 2K every year for 10 years wont hurt your tax situation as much as a 20K today might. Could be a good vacation plan.
    When you draw it, you will pay the tax. Goobermint doesnt wait.

    I got in a month prior to that and the Inherited IRA is not subject to that. I still have to take a MRD, but the IRA can sit there until I want to take it. I get the MRD just prior to the high power season.

    Sounds like you are the executor. There is a reason executors get paid. If your dad had any whole life policy's like from a mortgage rider on a house he bought 60 years ago and kept the policy, good luck. It took me a year to get a policy paid from NY Life because it was attached to a mortgage that was at a bank that had been sold and the paper was bought 7 times. 6 times from defunct banks. The Life insurance co has exactly zero interest in paying you and will NOT track down the paper to find that the loan was settled. They will call Bobs Bank East because the name looks like Bobs Bank that went under 40 years ago, every 3 months and quit. At least NY Life did. And as a bonus, they wont offer any information either. I ended up on the SEC website for a few days after i was able to pry some info from NY Life. 
    So just a tip from your Uncle Varm to anyone reading this. If you have a whole life mortgage policy to protect the bank, the DAY you pay off the mortgage, get rid of it for your kids sake.
    It's boring, and your lack of creativity knows no bounds.
  • VarmintmistVarmintmist Senior Member Posts: 7,673 Senior Member
    Depending on what all you have to deal with, a lawyer who deals in estates might be handy. Depending on how much you need to use them it can be OK in price. I thought I was going to get off pretty cheap, but my father didnt put a beneficiary on one acct. Cost about 10K more in lawyer fees.
    It's boring, and your lack of creativity knows no bounds.
  • JayJay Senior Member Posts: 4,119 Senior Member
    Thanks uncle Varm...  :D

    You are correct. I am the executor.  So far, everything has been pretty smooth. Dad's will left everything to me.  He and I already co-owned our farm together and he already had me on all his accounts in case something like this happened. He also gave me power of attorney while he was still alive, so I was able to take care of a lot before he passed. I also have the Letter Testamentary through the probate court, so I am able to continue taking care of business. So far I have not had any trouble. I've already collected all his accounts and almost all his life insurance policies.  I'm waiting to hear back on one from a former employer. I am informally probating the will through the county. If anything comes up that gets too tricky, they require the probate be sent to the state district court, at which point I will need a lawyer. So far, it hasn't come to that.  Luckily, it's been a pretty clean process to this point.  I hope it stays that way.

    Thanks for the advice. I'm planning to FINALLY have dad's memorial services this weekend at the farm. Right now, I have decided to put the estate stuff aside and get through this weekend.  I have enough going on at the moment.  So I'll pick back up on this next week when the dust settles, the hangover is done and family have gone back home...  :p
  • VarmintmistVarmintmist Senior Member Posts: 7,673 Senior Member
    You have to put it aside and do life a bit.

    My father had everything liquid by the time he passed. He made the decision to sell his house and go into a retirement apartment. The cost would have been a grand (lawyer, getting sworn in) if he put a beneficiary on that account. Other accounts we were joint on or myself or sister was beneficiary which made us co-owners so they transferred directly after state grave robber tax so it was a matter of providing paperwork for most things. If there is ANY account (in PA) over 10K that does not have a beneficiary or joint owner, that kicks in another set of rules that is applied to everything which cost the estate more then 10K.

    He left me more, but his will stated equal distribution, so thats what I did. I saw his sister cause hate and discontent over a kitchen chair when my grandmother died and I have no use for that. Might have had a different opinion if I needed it, but if I needed it at this point in my life, he probably wouldnt have made me executor.

    Count on one thing. It WILL be over soon and you can get back to living.
    It's boring, and your lack of creativity knows no bounds.
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