Inheritance to 401k question?
Inheritance to 401k question?
Hello, I will be receiving a tax-free inheritence shortly. Before I put money into a CD I want to make sure mine and my wife's traditional 401k is maxed out. My question/concern is that since this money coming in to me won't be taxed, how can I avoid being taxed on it come withdrawl time from my tax-deferred 401ks? Is it even smart to put this money in a tax defered account? How do most people handle large sums of money coming in unexpectidley?
Answers:
Robert L www.gogreedy.com: Let me start by answering your last question first. I would handle a large sum of money coming in unexpected with a grin on my face that you couldn't knock off with a 2x4.
Seriously though I would take the money and put it into a personal IRA. (roth IRA) This way it will remain tax free until you retire. Then you will only be taxed on the amount you take out each year. NOT the lump sum. Plus it will grow larger for you in the mean time. Nothing like having enough money to retire on. Good luck
Bob Laibach
www.gogreedy.com
2007-05-09 19:17:40
2007-05-09 19:17:40
Doug M: If you want to max out your 401k, then do so by dialing up your contributions out of your paychecks for the rest of the year. You have plenty of time to do so and if you do it that way, you'll save yourself the taxes that you would otherwise be paying on that take home pay.
Then put a few thousand of the inheritance in a money market or something and use it to bridge the gap in your monthly expenses that you might otherwise be having a problem with (having decreased your take home pay to fund your 401k fully).
I'd continue to do so over the years -- fund that 401k to the max, but do it with pre-tax dollars. Your inheritance is "no-tax" dollars, so you don't have anything to save there!
And to answer your question about what most people do -- they waste it. For some reason Americans consider things like "found money" to be "money I absolutely have to spend on something". People hate to save, for some reason, and prefer living paycheck-to-paycheck from cradle to grave.
Not me -- any found money that comes my way is immediately invested. I live beneath my means and don't really change that much based on my income.
Doug
2007-05-09 19:24:48
2007-05-09 19:24:48
gosh137: Robert L. is wrong. If you put into a ROTH IRA, it is not taxed when you take it out. An inheritance is tax free to you and considered after tax money because it has already been taxed (estate taxes if the estate is large enough).
When you asked "how can I avoid being taxed on it come withdrawal time from my tax-deferred 401k?" You can't put it into a 401k, that is for wages only.
Many mutual fund families offer tax-managed funds.
2007-05-09 19:31:19
2007-05-09 19:31:19
Chosen Answer
Bulk O: Here is a few facts that you seem to be missing. First off you will be taxed when you withdraw money from your 401K or a traditional IRA. You don't think that the IRS was going to let you out of the taxes did you? You are simply delaying paying tax, as in not as you earn it, but later when you withdraw it. Next you can't take outside money and put it into a 401K. You can choose to up what is taken out of your paycheck as long as that does not exceed the maximum your plan allows, and it does not exceed the maximum for the year (this year $15,500). If you are 50 or older you can put in up to $5000 more in, again taken out of your pay check. And since the only way to have enough money to leave on and increase the 401K deduction is to cash out of this tax-free inheritance (and pay taxes) this isn't what you want. Personally I don't know of any "tax-free inheritance" so I don't know what it is and how it is handled. If it is handled like an IRA or a 401K you can roll it into an traditional IRA. And never hear of tax-free when used with inheritance. Edit: It seems that gosh has answered the "tax-free" question. Tax was paid, it just was paid before you got the money, so you certainly don't want that money in a traditional IRA and you can't put it in a 401K (directly). But you could use if for regular expenses and up the amount you put into the 401K by the same amount (if less then the max). But most likely the Roth IRA is best for you. The other form of IRA is the Roth, and the deal on that is you pay the tax now, and then you don't have to pay tax on that money or the profits of that money when you take it out. So if you have to pay tax on it now, then this is a good place for it, but if you don't have to pay tax some how then you should keep it where it is (maybe this is some kind of trust for the future or annuity?) or if possible roll it over into a traditional IRA. Also on the idea of why delay paying tax until you retire. The theory is that you will be paying less tax then and also you will be able to use the profit now for investing without the tax. Will you be paying less tax in the future? Hard to say what will happen to the tax rates in the future, but the belief is that you will pay less because you will have one more deduction, but more importantly you should have small expenses (your house paid off) and you can draw out only what you need (and tax that smaller rate) instead of getting a paycheck that has to save for the future, and pay tax on that extra money. The other part of this is say you have a mutual fund in a taxable account. Each year it makes some money. The IRS is going to want tax money on that. Now say you have a mutual fund in a IRA or 401K, each year you make money, but the IRS does any tax, instead what would have been tax is no put back into the mutual fund and this keeps happening until you retire and start to take the money out. You take out just what you need and pay tax on that. Edit: To answer your last question. I would bet most people would just spend it. Personally I would most likely save it in some maner or put it on a down payment for the house or something like that. And maybe spend a small fraction of it.
2007-05-10 00:43:53
Bulk O: Here is a few facts that you seem to be missing. First off you will be taxed when you withdraw money from your 401K or a traditional IRA. You don't think that the IRS was going to let you out of the taxes did you? You are simply delaying paying tax, as in not as you earn it, but later when you withdraw it. Next you can't take outside money and put it into a 401K. You can choose to up what is taken out of your paycheck as long as that does not exceed the maximum your plan allows, and it does not exceed the maximum for the year (this year $15,500). If you are 50 or older you can put in up to $5000 more in, again taken out of your pay check. And since the only way to have enough money to leave on and increase the 401K deduction is to cash out of this tax-free inheritance (and pay taxes) this isn't what you want. Personally I don't know of any "tax-free inheritance" so I don't know what it is and how it is handled. If it is handled like an IRA or a 401K you can roll it into an traditional IRA. And never hear of tax-free when used with inheritance. Edit: It seems that gosh has answered the "tax-free" question. Tax was paid, it just was paid before you got the money, so you certainly don't want that money in a traditional IRA and you can't put it in a 401K (directly). But you could use if for regular expenses and up the amount you put into the 401K by the same amount (if less then the max). But most likely the Roth IRA is best for you. The other form of IRA is the Roth, and the deal on that is you pay the tax now, and then you don't have to pay tax on that money or the profits of that money when you take it out. So if you have to pay tax on it now, then this is a good place for it, but if you don't have to pay tax some how then you should keep it where it is (maybe this is some kind of trust for the future or annuity?) or if possible roll it over into a traditional IRA. Also on the idea of why delay paying tax until you retire. The theory is that you will be paying less tax then and also you will be able to use the profit now for investing without the tax. Will you be paying less tax in the future? Hard to say what will happen to the tax rates in the future, but the belief is that you will pay less because you will have one more deduction, but more importantly you should have small expenses (your house paid off) and you can draw out only what you need (and tax that smaller rate) instead of getting a paycheck that has to save for the future, and pay tax on that extra money. The other part of this is say you have a mutual fund in a taxable account. Each year it makes some money. The IRS is going to want tax money on that. Now say you have a mutual fund in a IRA or 401K, each year you make money, but the IRS does any tax, instead what would have been tax is no put back into the mutual fund and this keeps happening until you retire and start to take the money out. You take out just what you need and pay tax on that. Edit: To answer your last question. I would bet most people would just spend it. Personally I would most likely save it in some maner or put it on a down payment for the house or something like that. And maybe spend a small fraction of it.
2007-05-10 00:43:53
Blicka: Talk to a fee based financial advisor and they should point you in the right direction on all fronts.
2007-05-10 06:15:24
2007-05-10 06:15:24