Questions about parents retirement accounts

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Faraz
Posts: 5
Joined: Wed Sep 06, 2017 7:34 am

Questions about parents retirement accounts

Post by Faraz »

Hello all,

I'm helping my parents with their retirement and home purchase situation and I have some general questions I would like to get some advice on. Here are the details of what's going on:

- My parents are going to move closer to us (my wife and I) after retirement and are ready to buy a house (cash sale, no mortgage).
- Their current house is paid off.They will be selling that house and using the money to put towards the new house.
- My father is 71 years old and will be retiring in the next couple of months.
- He has a 401(k) and social security.
- My mother is 62 and quit working a few years ago and had her 401(k) rolled over to a traditional IRA.
- Since they won't have a mortgage, my parents plan on living on their social securities and not use my father's 401k money or his savings account unless needed.

The funds for the new house will come from
  • Mother's IRA + savings account
  • Money from the sale of their current house
  • Some contribution from my uncle and my wife and I

My questions are:
  1. Since my father prefers not to use his 401k money and let it grow, what is the best thing for him to do with it after retirement? From what I understand, if he rolls it over to a traditional IRA, he would be required to take minimum distributions. Is he eligible to rollover to a Roth IRA and avoid the RMDs? Is there a way to estimate how much a rollover to Roth IRA will be taxed? Are there any other options available to him that wouldn't involve taking RMDs?
  2. We are planning for him to rollover to Vanguard (from Principal). What is the best fund for him to use to generate a decent amount of income into his savings account to make his savings grow? I had done a little research and some good ones seem to be VWIAX, VPGDX, and VSCGX.
  3. My mother will be withdrawing all of her IRA money to her savings account to use towards the house. Would she just be withdrawing all the money and then paying the tax on it in next year's tax return? Or does she have to pay tax on it now?
Thank you for your help and advice.
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JoeRetire
Posts: 15381
Joined: Tue Jan 16, 2018 1:44 pm

Re: Questions about parents retirement accounts

Post by JoeRetire »

Faraz wrote: Tue Sep 18, 2018 6:17 am The funds for the new house will come from
  • Mother's IRA + savings account
  • Money from the sale of their current house
  • Some contribution from my uncle and my wife and I
Why are your uncle and you contributing toward the house rather than taking it out of your parents' 401k?
From what I understand, if he rolls it over to a traditional IRA, he would be required to take minimum distributions.
He will be required to take minimum distributions from a 401k even if it isn't rolled over.
Is he eligible to rollover to a Roth IRA and avoid the RMDs? Is there a way to estimate how much a rollover to Roth IRA will be taxed?
Yes, he is eligible.
He will pay taxes on all the funds rolled over. It will be taxed as ordinary income.
Are there any other options available to him that wouldn't involve taking RMDs?
I think charitable contributions might avoid RMDs, but I'm guessing that's not what you are looking for. The government wants its taxes. But I read that the current administration is thinking of changing the RMD rules, but that won't happen this year.
My mother will be withdrawing all of her IRA money to her savings account to use towards the house. Would she just be withdrawing all the money and then paying the tax on it in next year's tax return? Or does she have to pay tax on it now?
It will show up on her 2018 tax return if she withdraws it this year.
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Silk McCue
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Joined: Thu Feb 25, 2016 6:11 pm

Re: Questions about parents retirement accounts

Post by Silk McCue »

Faraz wrote: Tue Sep 18, 2018 6:17 am My questions are:
  1. Since my father prefers not to use his 401k money and let it grow, what is the best thing for him to do with it after retirement? From what I understand, if he rolls it over to a traditional IRA, he would be required to take minimum distributions. Is he eligible to rollover to a Roth IRA and avoid the RMDs? Is there a way to estimate how much a rollover to Roth IRA will be taxed? Are there any other options available to him that wouldn't involve taking RMDs?

    Once you father retires (after 70.5), whether in a 401k or IRA, RMDS are required. He has been able to avoid an RMD because he is still employed. If he retires this year (even if he retires on December 31 2018) he will be required to take an RMD for this year by April 1st 2019. If he retires (his last day of work) is on or after Jan 1 2019 he will not required to take and RMD for 2018. See this source - https://www.kitces.com/blog/still-worki ... ent-owner/

    He can perform a Roth conversion to a Roth IRA but as you note taxes will be due. Apart from that RMD's will be due. It is important to estimate their 2018 taxes in order to determine how much headroom is available in the 12% bracket to support Roth conversions of his funds or withdrawal from your mothers IRA. Depending upon their Social Security income and other sources they may very have headroom in their taxes in the coming years to perform Roth conversions up to the top of the 12% bracket (that may be easier in future years when he has no employment income). You will have to pay close attention to the taxation of Social Security income which is impacted as other income rises (including Roth conversions).
  2. We are planning for him to rollover to Vanguard (from Principal). What is the best fund for him to use to generate a decent amount of income into his savings account to make his savings grow? I had done a little research and some good ones seem to be VWIAX, VPGDX, and VSCGX.

    The investment decision must be driven by the asset allocation that is appropriate for your parents. When one of them passes their Social Security benefit will disappear and the remaining spouse will receive the higher of the two benefits. If your mother hasn't started Social Security their are claiming strategies that can be taken advantage to maximize their joint benefit (others would have input on this).
  3. My mother will be withdrawing all of her IRA money to her savings account to use towards the house. Would she just be withdrawing all the money and then paying the tax on it in next year's tax return? Or does she have to pay tax on it now?
If there is headroom for a Roth conversion your mothers IRA may be a good place to do that this year in case your father chooses to work until January 1st 2019 to avoid an RMD being due for 2018 as I referenced earlier. If not, and you choose to withdraw the funds for the house you will want to estimate the taxes due upon all income and make a fourth quarter estimated tax payment in January to avoid the potential for a tax penalty.

Thank you for your help and advice.
carolinaman
Posts: 5463
Joined: Wed Dec 28, 2011 8:56 am
Location: North Carolina

Re: Questions about parents retirement accounts

Post by carolinaman »

JoeRetire wrote: Tue Sep 18, 2018 7:32 am
Faraz wrote: Tue Sep 18, 2018 6:17 am
From what I understand, if he rolls it over to a traditional IRA, he would be required to take minimum distributions.
He will be required to take minimum distributions from a 401k even if it isn't rolled over.
Is he eligible to rollover to a Roth IRA and avoid the RMDs? Is there a way to estimate how much a rollover to Roth IRA will be taxed?
Yes, he is eligible.
He will pay taxes on all the funds rolled over. It will be taxed as ordinary income.
Are there any other options available to him that wouldn't involve taking RMDs?
I think charitable contributions might avoid RMDs, but I'm guessing that's not what you are looking for. The government wants its taxes. But I read that the current administration is thinking of changing the RMD rules, but that won't happen this year.
My mother will be withdrawing all of her IRA money to her savings account to use towards the house. Would she just be withdrawing all the money and then paying the tax on it in next year's tax return? Or does she have to pay tax on it now?
It will show up on her 2018 tax return if she withdraws it this year.

Carolinaman wrote:

Just to be clear, any funds rolled over to a Roth IRA are independent of RMDs. They do not change the RMD requirement.

Careful tax planning and strategies are needed for RMDs, Roth conversions and IRA withdrawal by your mother. It sounds like you parents will be pushed into a higher tax bracket for this year and possibly future years depending on what conversions and withdrawals they do. Some tax analysis is warranted to determine the best timing of all these withdrawals and conversions.

Also, be aware that Medicare Part B payments for your father will go up if their Modified Adjusted Gross Income exceeds $170k which sounds possible if they do too much of these withdrawals and conversions in one year.
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Watty
Posts: 28860
Joined: Wed Oct 10, 2007 3:55 pm

Re: Questions about parents retirement accounts

Post by Watty »

Faraz wrote: Tue Sep 18, 2018 6:17 am - My father is 71 years old ...
- My mother is 62 .....

The funds for the new house will come from
Mother's IRA + savings account
Your dad will have RMD's to deal now with but your Mom not have these for 8 more years. There may be other family dynamics going on but it might make sense for the money for the house to come from your dad's retirement account instead of your mom's IRA. For example if they need to take $100K from one of the accounts to buy the house then next year when your dad's RMD is calculated the balance would be $100k lower.
billfromct
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Joined: Tue Dec 03, 2013 8:05 am

Re: Questions about parents retirement accounts

Post by billfromct »

You need to do some accurate 2018 tax planning especially since it appears there are several sources of taxable income:
-your father's 2018 earned income
-your father's potential 2018 IRA/401k RMD
-your mother's taxable IRA distribution (if she takes money out for the house purchase)
-your mother's SS if she is collecting SS (is she collecting SS?)
-your father's SS

You will probably need to do the same for 2019 as well depending whether your mother takes her IRA money out in 2018 or 2019. It appears that 2019 may be a lower taxable income year since your dad will no longer be working, so no earned income coming in.

It seems like a lot of income will be bunched up in 2018.

bill
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