Large Inheritance: What's the max I can put into retirement?

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Tyr0ne
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Large Inheritance: What's the max I can put into retirement?

Post by Tyr0ne » Sun Sep 16, 2012 12:43 pm

I am 24, and in the 25% tax bracket. For a couple years I have put the max $5k into a Roth, and around ~$10k both years into my company's 401(k), with no company match. I also just discovered that a Roth 401k is also offered at my company. My main question is about maximum contributions. Do the rules for contribution limits for Roth IRA's, TIRA's, Roth 401k's, and traditional 401k's all exist independently of one another (i.e. can I max out all 4 accounts this year with the inheritance I am receiving?). And I'm guessing that since the inheritance isn't taxable, my income for the year for purposes of figuring out my contribution limits will be just my normal wages, correct? Moving forward, I would like to contribute half to pre-tax, and half to after-tax accounts, so I'm hoping there is no rule against contributing to a roth ira, roth 401k, and TIRA in the same year.

Appreciate any advice, thanks!
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livesoft
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Re: Large Inheritance: What's the max I can put into retirem

Post by livesoft » Sun Sep 16, 2012 12:51 pm

Presumably you did not put the inheritance under your mattress, so it will pay interest or dividends or both of some kind. You will be taxed on those earnings. They will be declared on Form 1040 Schedule B. You may also get a Schedule K-1 with some of those earnings that occurred before you received your inheritance.

Also whether you will be taxed on the principal of the inheritance will depend on what form it takes. For example, you may have inherited an IRA or a 401(k) or a 403(b) or a Roth IRA or a 'taxable' account or an annuity. Some of those will be taxed as you withdraw assets.
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archbish99
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Re: Large Inheritance: What's the max I can put into retirem

Post by archbish99 » Sun Sep 16, 2012 12:55 pm

You have a limit for IRAs, whether Traditional or Roth. You can use it for either, or split. You have a separate 401k limit, whether Traditional or Roth. And of course, while these are the limits for tax-advantaged accounts, there's nothing that stops you from saving for retirement in a taxable account as well.

In the 25% bracket, I'd probably stick to Traditional, but that decision involves a projection of your future tax rates.
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namaste
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Re: Large Inheritance: What's the max I can put into retirem

Post by namaste » Sun Sep 16, 2012 1:35 pm

It seems you can only max out the 401K and the Roth IRA. Do you have an HSA available to you? Would a 529 be of interest to you? You could put in taxable and then move it to Roth IRA every year while you're maxing out your 401K.

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Re: Large Inheritance: What's the max I can put into retirem

Post by dbr » Sun Sep 16, 2012 1:50 pm

If you inherited a pass through trust you may also have assets with significant unrealized gains which would be taxable if you sold the assets in order to make a tax deferred account contribution.

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Tyr0ne
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Re: Large Inheritance: What's the max I can put into retirem

Post by Tyr0ne » Sun Sep 16, 2012 2:00 pm

Thanks for all the great responses so far. I believe I will just be inheriting cash only. The estate held a house for an enormous gain which it recently sold for all cash. The rest of the estate was a large sum of cash in a checking account.

It sounds like I should just max out the 401k and Roth, and if I want to split 50/50 between after-tax and pre-tax, I should put 5k in roth ira, 6k in roth 401k (11k total in after-tax), and 11k in tradtitional 401k. I too would like to believe that I won't be in the 25% bracket when I retire in 40 years, but impossible to guess.
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Kevin M
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Re: Large Inheritance: What's the max I can put into retirem

Post by Kevin M » Sun Sep 16, 2012 2:03 pm

tycoryj wrote:And I'm guessing that since the inheritance isn't taxable, my income for the year for purposes of figuring out my contribution limits will be just my normal wages, correct?
Correct--your earned income is the upper limit on total contributions to IRAs and 401k plans, in addition to the limits on maximum contributions to each type of plan, which are 5,000 and 17,000 respectively (for someone under age 50). So if you make somewhat over $22,000 per year, you could contribute 100% of your salary less payroll taxes, assuming your 401k plan allows it (some plans limit the percent of salary you can contribute).
Moving forward, I would like to contribute half to pre-tax, and half to after-tax accounts, so I'm hoping there is no rule against contributing to a roth ira, roth 401k, and TIRA in the same year.
You can contribute to Roth and traditional IRAs in the same year, but cannot exceed the $5,000 limit for the total contributions to both. If your employer plan allows it, you can contribute to both traditional and Roth 401k plans, but again, total contributions cannot exceed $17,000. Since the IRA limit is relatively small, I wouldn't mess around with both types of IRAs, but just use one or the other.

You may want to put more into pre-tax plans unless you expect to have a fairly large income in retirement from sources other than distributions from your retirement plans, since you will want some income to fill up the lower tax brackets (including the 0% bracket due to deductions and exemptions).

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livesoft
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Re: Large Inheritance: What's the max I can put into retirem

Post by livesoft » Sun Sep 16, 2012 2:26 pm

tycoryj wrote:Thanks for all the great responses so far. I believe I will just be inheriting cash only. The estate held a house for an enormous gain which it recently sold for all cash. The rest of the estate was a large sum of cash in a checking account.
You may be responsible taxes on some of the gains in the house. For example, the house will get valued as of date of death of deceased, but take some time to sell. In the meantime, house prices go up. Owners (i.e. the heirs) are responsible for taxes on the capital gain if there is one that might occur between sale date and date of death of deceased.

And the same might go for any interest that the cash earned before you got it.
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Re: Large Inheritance: What's the max I can put into retirem

Post by dickenjb » Sun Sep 16, 2012 2:32 pm

You can put ALL of your inheritance into your retirement. As noted above, only $17K can go into a 401(k) and only $5K into an IRA. You can put the rest into taxable investments. Perhaps that will allow you to max out your tax favored retirement accounts for years to come.

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Kevin M
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Re: Large Inheritance: What's the max I can put into retirem

Post by Kevin M » Sun Sep 16, 2012 3:17 pm

Regarding the house, you actually can end up with a capital loss due to the costs of selling the house. If the house was sold relatively soon after death, then I think it's defensible to value the house at the sale price, which is your inherited basis. Because of commissions and closing costs, you net less than the basis, so there is a capital loss, which should be reported on the 1041 for the estate, and your portion should be reported on the K-1 you receive. This loss is reported on your Schedule D, which can be used to offset up to $3,000 of ordinary income, other cap gains, and the rest carried forward to subsequent years.

This was exactly my situation when my Dad died and we inherited his condo, and my girlfriend's situation when her Mom died and she and her siblings inherited her house.

Of course if prices are rising rapidly in your area, and it is several months between death and sale, then you may have a gain, but the costs of sale may more than offset the gain.

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namaste
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Re: Large Inheritance: What's the max I can put into retirem

Post by namaste » Sun Sep 16, 2012 3:56 pm

You can leave the rest of it in a money market account until you decide. Make sure you review the tax efficient placement in the wiki and ask any questions about that.

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Re: Large Inheritance: What's the max I can put into retirem

Post by Spirit Rider » Sun Sep 16, 2012 3:56 pm

One thing to keep in mind. Normally when considering whether it is best to use traditional or Roth versions of IRA/401k, there are a series of considerations.

One consideration in your case is that a maximum ROTH contribution is a higher net contribution than a traditional contribution. So unless you need the deduction to qualifiy for ROTH IRA contribution, you would be better off with all Roth contributions.

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Kevin M
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Re: Large Inheritance: What's the max I can put into retirem

Post by Kevin M » Sun Sep 16, 2012 4:17 pm

Spirit Rider wrote: One consideration in your case is that a maximum ROTH contribution is a higher net contribution than a traditional contribution. So unless you need the deduction to qualifiy for ROTH IRA contribution, you would be better off with all Roth contributions.
This is not necessarily true. If you pay zero taxes on distributions from a tIRA (and get a tax deduction going in), you are better off with a tIRA. Don't think this is possible? It is for some people. In general, if the taxes you pay on tIRA distributions are significantly lower than the deductions you received on contributions, you are better off with a tIRA.

A very good primer on this topic is this blog post by tfb: The Case Against Roth 401(k)

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Bob's not my name
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Re: Large Inheritance: What's the max I can put into retirem

Post by Bob's not my name » Sun Sep 16, 2012 7:49 pm

Since you have been contributing $7,000 less than the maximum, your $150,000 inheritance will allow you to max out for many years, but don't assume that you have an inexhaustible well. If you decide to buy a house you may need most or all of the inheritance for a 20% down payment. If you marry, you will have more tax-advantaged space available to you (and you might marry some debt). I think some of the responses assume that you will always be short of tax-advantaged space, but that may not be the case.

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Re: Large Inheritance: What's the max I can put into retirem

Post by baw703916 » Sun Sep 16, 2012 8:22 pm

One thing to be careful of is whether taxable income from the estate could put you over the Roth IRA limit. Depends on how close you are currently, and what the amount of any taxable distributions will be. If you think you might be close, it may be worth asking the estate executor what distributions there are liable to be.

If you are over the limit, there is the "back door" way to contribute to a Roth (in two steps). But the procedure is different, so you do have to know into which category you fall.
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