Inherited 403b - lump sum?

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Topic Author
goru
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Joined: Fri Mar 01, 2013 11:00 am

Inherited 403b - lump sum?

Post by goru »

My father-in-law recently passed away leaving my mother-in-law as named beneficiary on a 403b account. Unfortunately, my mother-in-law's condition is not well. She has been in a skilled nursing center for several years and thus has large health care expenses that qualify as healthcare deductions. We are considering the lump sum distribution option on the 403b. Any income to declare as a result of the distribution would be offset by the large healthcare deductions. So we believe no tax would be due on the distribution.

We are looking to the collective wisdom on this site to point out any additional considerations we may be overlooking. Thanks in advance for any advice.
livesoft
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Re: Inherited 403b - lump sum?

Post by livesoft »

If there will be no taxes to pay, may I suggest that she does a conversion to a Roth IRA (if possible) instead of a lump-sum distribution. Do I need to explain why that will be better?
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Topic Author
goru
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Joined: Fri Mar 01, 2013 11:00 am

Re: Inherited 403b - lump sum?

Post by goru »

Thanks for the suggestion. Here's a little more information that might help decide if a Roth IRA is the way to go. Mother-in-law's prognosis is not good at this point. She has been on/off dementia hospice over the past 18 months. She is about to go on hospice again (meaning doctors believe she has less than six months, of course that's what they thought 18 months ago). One of our drivers is trying to simplify estate administration once she passes. There are four children to receive assets equally. She has sufficient resources (outside these 403b funds) to fund her expenses for several years. Though not near enough to worry about estate taxes. Basically, the primary thought is, can we withdraw the 403B funds now and effectively pay no income tax, then only owe the much lower inheritance tax in the future.

If the Roth conversion is a better option, then yes, please provide a little more information. Thanks again for your time and suggestions.
placeholder
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Re: Inherited 403b - lump sum?

Post by placeholder »

Here is some information about inherited Roth IRAs:
http://fairmark.com/retirement/roth-acc ... -roth-ira/
2stepsbehind
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Re: Inherited 403b - lump sum?

Post by 2stepsbehind »

If she has sufficient taxable assets to pay her bills, why would you want to take the tax hit now?

ETA: whats the likely size of her estate and what are the state inheritance taxes you are trying to avoid? OP either way I'd tread carefully on this as the in-law given your spouse seemingly has other siblings. Make sure all of them are on the same page.
Last edited by 2stepsbehind on Sun Sep 14, 2014 2:29 pm, edited 1 time in total.
Minot
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Re: Inherited 403b - lump sum?

Post by Minot »

2stepsbehind wrote:If she has sufficient taxable assets to pay her bills, why would you want to take the tax hit now?
OP said:
We are considering the lump sum distribution option on the 403b. Any income to declare as a result of the distribution would be offset by the large healthcare deductions. So we believe no tax would be due on the distribution.
Please note sentences in bold.
2stepsbehind
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Re: Inherited 403b - lump sum?

Post by 2stepsbehind »

Yes, the OP said they believe that there would be no taxes due, but it is not clear to me that they've actually done the calculation.
Topic Author
goru
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Re: Inherited 403b - lump sum?

Post by goru »

Total assets are ~ $300K in taxable joint accounts. 200K in small IRAs/life insurance/403b.

403b balance is $65K.

Healthcare expenses in 2014 ~$200K.

AGI ~$80K on pensions, interest income, etc.. So idea is:

- Take lump sum. AGI goes to $145K. Tax in 2014 is still zero due to deductions.
- anything remaining in estate in future would be taxed at PA 4.5% inheritance tax.

So not trying to avoid inheritance tax. Actually, the premise here is thats a good trade relative to any income tax on future inherited IRAs.

Sibling agreement will occur before any action is taken. Will likely consult tax/elder law attorney. Just fact finding and trying to get smarter. :happy
Topic Author
goru
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Re: Inherited 403b - lump sum?

Post by goru »

Thanks for the link. Will definitely consider the Roth conversion option.
Bob's not my name
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Re: Inherited 403b - lump sum?

Post by Bob's not my name »

Yes, Roth conversion is the obviously superior choice. Same tax now (0% federal, maybe 0% state), less tax in the future.

Why do you need sibling agreement? Who has the responsibility and authority to make the decisions?
2stepsbehind
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Re: Inherited 403b - lump sum?

Post by 2stepsbehind »

Yeah, given what you've posted it seems like conversions to roth are your best bet (assuming everyone is on board). Ed Slott has some great books on the topic/pitfalls to avoid while converting.
Bob's not my name
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Re: Inherited 403b - lump sum?

Post by Bob's not my name »

2stepsbehind wrote:(assuming everyone is on board)
Why? Whoever has the authority to make the decisions has the authority. Whoever doesn't doesn't.
2stepsbehind
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Re: Inherited 403b - lump sum?

Post by 2stepsbehind »

Bob's not my name wrote:
2stepsbehind wrote:(assuming everyone is on board)
Why? Whoever has the authority to make the decisions has the authority. Whoever doesn't doesn't.
Because sometimes it is worth preserving harmony over maximizing profits. Do you know how many family squabbles stem from the perception that someone exerted undue influence over a dying relative? Particularly given the OP is discussing his/her spouse's father rather than his/her own, caution is warranted.
Bob's not my name
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Re: Inherited 403b - lump sum?

Post by Bob's not my name »

More squabbles result from pursuit of consensus than from exercising the authority the elderly person gave you for a reason. It's not clear if the OP has that authority.
2stepsbehind
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Re: Inherited 403b - lump sum?

Post by 2stepsbehind »

Bob's not my name wrote:More squabbles result from pursuit of consensus than from exercising the authority the elderly person gave you for a reason. It's not clear if the OP has that authority.
I sincerely doubt the OP has that authority or s/he would have written "I have POA over my mother-in-law's affairs." Instead s/he speaks in the royal we. It is not clear to me given the father in law's recent passing and the health of the mother that POA designations have been made so that to me suggests consensus gathering is the safer course. YMMV.
Bob's not my name
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Re: Inherited 403b - lump sum?

Post by Bob's not my name »

You're homing in on my intent. Almost there. Hint: if a group of guys all agree to rob a bank, is the robbery legal?
2stepsbehind
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Re: Inherited 403b - lump sum?

Post by 2stepsbehind »

Bob's not my name wrote:You're homing in on my intent. Almost there. Hint: if a group of guys all agree to rob a bank, is the robbery legal?
Are they too big to jail?
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