What to do with Inherited Deffered Comp $20k

[douglasj76]

My wife is inheriting $20k in deferred comp from her father. They are saying it has to be liquidated completely in 10 years. Looks like it will count as income. We do not have a need for this money, I would just like to make sure it is Invested and growing for the next 10 years. Thinking of cashing out, paying tax and using it for the wifes and myself Roth contribution. Or is it best to take a minimum distribution over 10 years?

[retired@50]

My wife is inheriting $20k in deferred comp from her father. They are saying it has to be liquidated completely in 10 years. Looks like it will count as income. We do not have a need for this money, I would just like to make sure it is Invested and growing for the next 10 years. Thinking of cashing out, paying tax and using it for the wifes and myself Roth contribution. Or is it best to take a minimum distribution over 10 years?

Hard to say what's "best", but since you don't need the money, I see no reason to rush the distribution.

Since it's your wife who is inheriting, what does she want to do? <- This is where the discussion should probably start.

Regards,

[douglasj76]

My wife is inheriting $20k in deferred comp from her father. They are saying it has to be liquidated completely in 10 years. Looks like it will count as income. We do not have a need for this money, I would just like to make sure it is Invested and growing for the next 10 years. Thinking of cashing out, paying tax and using it for the wifes and myself Roth contribution. Or is it best to take a minimum distribution over 10 years?

Hard to say what's "best", but since you don't need the money, I see no reason to rush the distribution.

Since it's your wife who is inheriting, what does she want to do? <- This is where the discussion should probably start.

Regards,

Thank you for the reply. Discussion with the wife has started. She trusts me to make the investing decisions for the family, and she takes care of the day to day bills. It's a great setup .

[barnaclebob]

Will withdrawing all of it now bump you up a tax bracket? Are you expecting to go to a lower tax bracket in the next 10 years?

If No and No, then there is no real downside to withdrawing now.

[aristotelian]

My wife is inheriting $20k in deferred comp from her father. They are saying it has to be liquidated completely in 10 years. Looks like it will count as income. We do not have a need for this money, I would just like to make sure it is Invested and growing for the next 10 years. Thinking of cashing out, paying tax and using it for the wifes and myself Roth contribution. Or is it best to take a minimum distribution over 10 years?

Can you clarify, do you have earned income? If so, why aren't you already contributing to a Roth IRA?

Your plan seems fine as long as you qualify for Roth and the $20k does not force you into a higher tax bracket.

[steadyosmosis]

Like others have already said, marginal tax rate would drive this decision for me.
Considering my current marginal rate, as well as each future year that I likely will be paying taxes.

[Watty]

It really depends on what your tax situation will be in the next ten year so there is no one easy answer.

Something to keep in mind though is that if it is invested in something like a total stock market index funds then withdrawn from the account ten years from now then any gains will be taxed at your ordinary income tax rate.

If it is withdrawn now and invested in a taxable account it will be taxed at the lower long term capital gains tax rate. If the stock market dips you may also have an opportunity to do some tax loss harvesting.

The federal tax brackets are also scheduled to revert to the old higher rates in 2026 if there are not any tax law changes.

If there is not a clear reason to delay the withdrawal then I would do it in 2024 or 2025 because it is just $20K, but that is just me. It is was $200K I would worry about it more.

[FellsGuy]

I believe by definition deferred comp has to be at risk so this money could disappear if the company goes under. Second if you’re making heavy money what difference can 20k make in the scheme of things it sounds like this amount is like finding change in the couch cushions. Cash it out “pay the taxes” toss what’s left on the pile. Maybe a five minute call to your tax attorney but I struggle to see how this moves the needle for you.

[SpideyIndexer]

My wife is inheriting $20k in deferred comp from her father. They are saying it has to be liquidated completely in 10 years. Looks like it will count as income. We do not have a need for this money, I would just like to make sure it is Invested and growing for the next 10 years. Thinking of cashing out, paying tax and using it for the wifes and myself Roth contribution. Or is it best to take a minimum distribution over 10 years?

Taking the minimum distribution will not deplete account in 10 years. See the IRS pub. The exact scenario varies somewhat with you wife's age, but taking min distributions in years 1-9 will leave somewhere around 55-60% at year 10 even if there is no growth. This is my quick stab at it. If you want to spread out the income over 10 years, it's pretty straightforward to write up a spreadsheet. Include growth and taxes, both of which will be estimates, and figure out how money winds up in your pocket. (For added refinement, you can convert the annual amounts to Present Value.)

For equally spread out income, you'd want to withdraw approx. $2K each year, but this amount will increase with percentage growth. Then subtract out tax bite to see the money in your pocket.

I am in a somewhat similar situation. If nothing significant changes, I plan to split my withdrawals between year 1 and year 2, because my income will jump in year 3, enough to push my withdrawals into a higher marginal tax rate. The exact amount to withdraw this year depends on my 2024 income, for which I am awaiting a clearer picture. Also, it's possible there will be tax law changes next year, so I plan to delay my 2nd (?) withdrawal until I have a better estimate of future tax rates.

As mentioned, an earlier withdrawal has the benefit of either giving you additional funds to spend ASAP, or if invested in equities, future earnings taxed at capital gains rates and/or useful capital losses, rather than earnings taxed as ordinary income or no capital losses to claim.

The short answer is "it's complicated."

[123]

A decision on how fast to take it out might depend on what it's invested in while the company holds it. Is it strictly fixed income at a standard interest rate that provides some growth? Can you elect to have some of it invested in stocks? If you want to hold it in stocks it might make sense to take it all out, pay the tax man, and invest it in a taxable account to get capital gains tax treatment. Any growth that happens while its in the deferred comp plan will just get taxed as ordinary income as its paid out.

[RetiredAL]

A decision on how fast to take it out might depend on what it's invested in while the company holds it. Is it strictly fixed income at a standard interest rate that provides some growth? Can you elect to have some of it invested in stocks? If you want to hold it in stocks it might make sense to take it all out, pay the tax man, and invest it in a taxable account to get capital gains tax treatment. Any growth that happens while its in the deferred comp plan will just get taxed as ordinary income as its paid out.

+1

Additionally, when withdrawn from the work plan, it's her inheritance and should go into an account in her name only. Who manages it is a separate item. In our household, DW takes no interest in managing our money.

A large part of my brokerage inheritance is in it's own separate account. DW is a named beneficiary and also has POA granted to her.

I manage DW's Roth via the POA she granted to me. I do so for her convenience.

[douglasj76]

A decision on how fast to take it out might depend on what it's invested in while the company holds it. Is it strictly fixed income at a standard interest rate that provides some growth? Can you elect to have some of it invested in stocks? If you want to hold it in stocks it might make sense to take it all out, pay the tax man, and invest it in a taxable account to get capital gains tax treatment. Any growth that happens while its in the deferred comp plan will just get taxed as ordinary income as its paid out.

+1

Additionally, when withdrawn from the work plan, it's her inheritance and should go into an account in her name only. Who manages it is a separate item. In our household, DW takes no interest in managing our money.

A large part of my brokerage inheritance is in it's own separate account. DW is a named beneficiary and also has POA granted to her.

I manage DW's Roth via the POA she granted to me. I do so for her convenience.

Thank you all for the reply. I took a step down at work recently to spend more time with the family, and that is less pay. For 2025 I will for sure be in a lower tax bracket. As of right now my plan is to wait until the calender flips 2025 then cash it in. I will be in a lower tax bracket and I'll take some of the money and set aside for taxes. From there I'll use it to contribute to both mine and the wife's roth ira right away in January. From there the money I would usually use for the Roth this year will be freed up to throw "in the pile". No need to open a account just for the wife, as I've been dumping money into her roth for years, no need to keep score.

Thank you again.

[RetiredAL]

A decision on how fast to take it out might depend on what it's invested in while the company holds it. Is it strictly fixed income at a standard interest rate that provides some growth? Can you elect to have some of it invested in stocks? If you want to hold it in stocks it might make sense to take it all out, pay the tax man, and invest it in a taxable account to get capital gains tax treatment. Any growth that happens while its in the deferred comp plan will just get taxed as ordinary income as its paid out.

+1

Additionally, when withdrawn from the work plan, it's her inheritance and should go into an account in her name only. Who manages it is a separate item. In our household, DW takes no interest in managing our money.

A large part of my brokerage inheritance is in it's own separate account. DW is a named beneficiary and also has POA granted to her.

I manage DW's Roth via the POA she granted to me. I do so for her convenience.

Thank you all for the reply. I took a step down at work recently to spend more time with the family, and that is less pay. For 2025 I will for sure be in a lower tax bracket. As of right now my plan is to wait until the calender flips 2025 then cash it in. I will be in a lower tax bracket and I'll take some of the money and set aside for taxes. From there I'll use it to contribute to both mine and the wife's roth ira right away in January. From there the money I would usually use for the Roth this year will be freed up to throw "in the pile". No need to open a account just for the wife, as I've been dumping money into her roth for years, no need to keep score.

Thank you again.

I did similar with inheritance from DW's Mom that got placed in a joint account. For 20 years until I retired, it was used to annually fund DW's Roth. She was a stay at home Mom. We are very unlikely to need any of our Roth $. Our Kids will get it.

[PaunchyPirate]

For “only” $20k, I would certainly cash this out as soon as possible as long as it didn’t impact my taxes a ton. A deferred comp plan in a small amount that was inherited isn’t worth the overhead of keeping it. It is “at risk” money that is tied to the life of the company that provided it. Clean up your finances and cash it out and put the money toward your bigger goals.

[SpideyIndexer]

My wife is inheriting $20k in deferred comp from her father. They are saying it has to be liquidated completely in 10 years. Looks like it will count as income. We do not have a need for this money, I would just like to make sure it is Invested and growing for the next 10 years. Thinking of cashing out, paying tax and using it for the wifes and myself Roth contribution. Or is it best to take a minimum distribution over 10 years?

Taking the minimum distribution will not deplete account in 10 years. See the IRS pub. The exact scenario varies somewhat with you wife's age, but taking min distributions in years 1-9 will leave somewhere around 55-60% at year 10 even if there is no growth. This is my quick stab at it. If you want to spread out the income over 10 years, it's pretty straightforward to write up a spreadsheet. Include growth and taxes, both of which will be estimates, and figure out how money winds up in your pocket. (For added refinement, you can convert the annual amounts to Present Value.)

For equally spread out income, you'd want to withdraw approx. $2K each year, but this amount will increase with percentage growth. Then subtract out tax bite to see the money in your pocket.

I misspoke in the above. For an Inherited IRA, the min distribution will not deplete the account balance in 10 years. There are IRS rules and publications for inherited IRA distributions. Deferred compensation is a different animal, and these plans may have different rules from each other. Read the plan description very carefully.

As mentioned, the health of the company is a factor. The company may change the plan rules at any time. I would venture to guess they don't care much about keeping heirs happy; rather the plans exist as a perk for highly paid employees.