401K

Hi terrycsanders,

Thanks for your question. The benefit of a 401k is that the money is put in before taxes are taken out and grows tax deferred. So the taxes on the 401k are deferred until the time they are withdrawn. You will most likely have to pay income tax anytime a 401k amount is taken out. I hope this helps 🙂 

Hi!

Before jumping into your inheritance question, I wanted to address the social security taxes quickly.  Whether or not social security income is taxable depends upon how much your Modified Adjusted Gross Income (MAGI) is (for many people, that number is pretty close to their adjusted gross income which can be found on line 11 of your form 1040).  If the MAGI is greater than $25K for single filers and $32K for married filing jointly filers, some portion of social security becomes taxable. The taxable portion starts at 50% and increases to 85% (depending on that MAGI).  Here is a great article that outlines the subject well.  If you only have social security income, you probably don't need to file, but if you are taking distributions from that 401(k), you may need to.  Here is a helpful article on that subject.

Yes, likely your daughter will need to pay taxes on the 401(k) distributions. Assuming that the contributions were pre-tax, the IRS will want it's cut!  Here is an article that will explain in more depth.  There are rules about how how long she has to distribute the 401(k) balance. Those rules can be impacted both by the plan and by IRS regs.   While we don't endorse Forbes, this article may be useful.

As to how much you can withdraw without paying taxes, to achieve that goal, your combined income would need to be less than $25K if single and $32K if married filing separately. Here is how you figure your combined income per this SSA page:

________________SSA Excerpt______________

You will pay tax on only up to 85 percent of your Social Security benefits, based on Internal Revenue Service (IRS) rules. If you:

• file a federal tax return as an "individual" and your combined income* is
  • between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
  • more than $34,000, up to 85 percent of your benefits may be taxable.
• file a joint return, and you and your spouse have a combined income* that is
  • between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits.
  • more than $44,000, up to 85 percent of your benefits may be taxable.

Here is how that combined income number is calculated:

Your adjusted gross income
+ Nontaxable interest
+ ½ of your Social Security benefits
= Your "combined income"

________________END SSA Excerpt______________

As you probably guessed, lowering your overall taxes means considering what your 401K withdrawal does to your combined income.  As you may know, there are required minimum withdrawals once you reach a certain age (more about that here).  As to how much more than the required minimum withdrawal you want to withdraw, consider if the withdrawal will result in your being in the 0%, 50%, or 85% taxable social security bracket.  After that, consider what tax bracket your taxable income will be in (after adding in that now potentially taxable social security income).  The higher the tax bracket you end up in the more you will pay on every new dollar of income.

Hope that helps!  Thanks for the question!