Drawing down inherited 401K plan. Any advice?

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chuckb84
Posts: 472
Joined: Wed Oct 21, 2015 10:41 am
Location: New Mexico

Drawing down inherited 401K plan. Any advice?

Post by chuckb84 »

We have all our retirement accounts at Vanguard, with a total that puts us just into the 2 comma club :). About 60% of that is my 401K, invested 55/45 with VTSAX, VTIAX and VBTLX, 40% is in two inherited IRA's invested in VDADX, VWENX and VWIAX.

The inherited accounts require a drawdown to zero in 10 years, but I'm about to turn 66 (DW about to turn 65), and I want to draw the inherited accounts down to zero before I hit required RMDs at age 72, so I need to draw it down in 6 years.

(The sum of the inherited IRAs)/6 is about 1.6 times what we need for expenses, after 20% withholding.

So, I'm planning to suspend withdrawals from my 401K and draw down the inherited ones before my own RMDs kick in, pay the tax :(, take out our expenses from those withdrawals and invest the excess in a taxable account.

The withdrawals are also calculated to just barely keep us out of the IRMAA threshold for Medicare. Going over that would be an extra cost of about $120/month, so there's a good incentive to stay below the threshold.

The main goal here, apart from what we need for monthly expenses, is to preserve a legacy for our kids.

I don't THINK there are any tax implications from withdrawing from inherited 401Ks that are different than withdrawing from my own? Other than the 10 year drawdown rule.

So, critiques, alternative plans?
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Watty
Posts: 21342
Joined: Wed Oct 10, 2007 3:55 pm

Re: Drawing down inherited 401K plan. Any advice?

Post by Watty »

Drawing down inherited 401K plan. Any advice?
You might consider rolling the inherited 401k out to an inherited IRA.

A potential issue is that if you die before the inherited 401k plan is depleted then the next person that inherits it could be limited in what they can do with an inherited 401k that is inherited a second time. You have two possible levels of restrictions, what a 401k plan can legally allow and what the 401k plan says it allows in the details of the plan document. It can be more restrictive and because of the costs and liability of running a 401k a company may not want to be providing the 401k for some grandkid years after the original owner retired.

It is a little bit different but the federal version of a 401k is the TSP and it has a nasty "gotcha" that can require all the funds to be taken out of the TSP all at once by the second inheritor in some situations.

https://www.bogleheads.org/wiki/TSP_estate_planning
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