From 24/7 Wall St. · Jake FitzGerald · · 1m
Why Traditional 401(k) Is Worst Account to Die With
Affluent investors over 60 convert 401(k)s to avoid tax bills for heirs.
In brief
Affluent investors over 60 convert 401(k)s to avoid tax bills for heirs. Wealthy investors over 60 convert traditional 401(k)s to tax-free inheritance for heirs. Originally reported by 24/7 Wall St..
Traditional 401(k) Tax Problem
Every dollar in a traditional 401(k) carries a hidden tax bill your heirs must pay.
“The account you spent decades building may be the worst possible gift”
Heirs Inherit Tax Bill
Beneficiaries must include taxable distributions in their gross income at heir's marginal tax rate.
“Beneficiaries 'must include in their gross income any taxable distributions they receive'”
10-Year Rule for Inherited 401(k)
Designated beneficiaries must empty traditional 401(k) by December 31 of 10th year after death.
“Under final IRS regulations, most beneficiaries must continue to take RMDs annually throughout the 10 years”
Roth Account Advantage
Roth distributions aren't taxed if you meet certain criteria and can be passed tax-free.
“An inherited Roth must be emptied within the 10-year window”
Tax Basis Reset
Taxable accounts get a step-up in basis meaning heir's cost basis resets to fair market value.
“Decades of unrealized gains go away for income tax purposes”
Tax Conversion Strategy
Convert traditional 401(k) to Roth before Medicare lookback and Social Security claiming add tax.
“Each converted dollar is taxed at your rate today so your heir never pays theirs”
Charity Option for Tax Savings
Leaving traditional 401(k) to charity avoids income tax for heirs.
“Leaving the 401(k) to charity and the Roth and taxable accounts to family puts each asset where it carries the least tax”
The key point
Wealthy investors over 60 convert traditional 401(k)s to tax-free inheritance for heirs.
