From 24/7 Wall St. · David Beren · · 1m 30s
Retiree's 401(k) Tax Bill Comparison
Retiree's $350k 401(k) leaves tax bill 2.7x higher for son in 32% bracket than parents in 12% bracket.
In brief
Retiree's $350k 401(k) leaves tax bill 2.7x higher for son in 32% bracket than parents in 12% bracket. A retiree in the 12% federal tax bracket who dies with $350,000 in a 401(k) and leaves it to a son in the 32% bracket faces a tax bill 2.7 times higher than if converted to Roth over ten years. Originally reported by…
Retiree's 401(k) Tax Bill
A retiree in the 12% federal tax bracket dies with $350,000 in a 401(k) and leaves it to a son in the 32% bracket.
Typical 401(k) Balance
Fidelity's data shows average 401(k) balances at $251,400 for savers aged 65 to 69 and $250,000 for those 70 and older.
Pre-Tax 401(k) Balance
Almost all $350,000 is pre-tax, as only 12.2% of Baby Boomers use a Roth 401(k).
Son's 10-Year Tax Rule
The son must fully distribute the account within 10 years, taxed at 32% per year.
Son's 10-Year Tax Bill
The son's $35,000 annual withdrawal costs $11,200 in federal tax over ten years at 32%.
Parents' Roth Conversion
Parents could convert $35,000 annually at 12% for $4,200 in federal tax per year.
Tax Bill Comparison
The son's tax bill is 2.7 times the parents' bill, a $70,000 difference over ten years.
Growth Impact
Growth inside a converted Roth is tax-free, while inherited traditional 401(k) growth is taxed at the son's rate.
Family Action Steps
Families can compare brackets, convert up to the 12% bracket ceiling, and pay tax from other savings.
Here's the gist
A retiree in the 12% federal tax bracket who dies with $350,000 in a 401(k) and leaves it to a son in the 32% bracket faces a tax bill 2.7 times higher than if converted to Roth over ten years.
