How Closely Do You Monitor Your 401k / Retirement

Splitting the savings is the way it should be done. Any savings that is subject to governmental rules in a deferred plan can change as easy as this did. I have been saving in a 401k since the program started in 1985 operating under a set of rules. Now the rules have changed so a different strategy is needed but it's to late for me.
 
One more note that many are not aware of because it got no press as it passed through congress. When a person with deferred savings (401k and all the other similar vehicles) that has saved pretax dollars passes away with funds remaining there is usually a pay on death benificiary. Prior to 1/1/2020 the law said that you would take age 86 (some version of life expectancy) minus the age of the benificiary and then divide the deferred funds by that number and the results was the dollar value that had to be withdrawn that year. It was meant to prevent untaxed savings to merely pass from generation to generation. So if a couple has $1 million in savings and tragically passes with one 30 year old child then the child would have to withdraw 1/56 (86-30) of the funds in the first year or $17,857. Each year the calculation would change based on him being a year older. No problem.

Well the new law that went into effect 1/1/2020 says that if the same situation occurs as described above that the benificiary now has 10 years to withdraw all the money. So their taxable income on receiving the retirement dollars goes from $17,857 a year to $100,000 a year. And the government gets a much larger chunk of the money via taxes. This was not a partisan political move either as it came out of the house to the senate with only something like 6 dissenting votes. All the folks in Washington agreed they wanted a much larger slice of the pie. Oh and if you say what the heck I won't take it out, remember this. The penalty for failing to take a RMD (required minimum distribution) is 50% of the amount you were supposed to take.
I will have to check on this as I continued my mom's IRA distributions at the same rate she was withdrawing them at. I suspect my financial adviser will let me know. I also wonder if since she passed away 7 years before the law changed if I am grandfathered.
The original idea of both IRAs and 401ks was to protect money from taxes until it was withdrawn. Over the last 40 years they have gradually reduced the tax deferral. Apparently too many people are stashing too much money into tax deferred programs, which is funny based on all the reports on how little people are saving.
Also, thinking aloud here, it makes me wonder if Congress will try and find a way to tax Roth 401k's and Roth IRAS.
 
One more note that many are not aware of because it got no press as it passed through congress. When a person with deferred savings (401k and all the other similar vehicles) that has saved pretax dollars passes away with funds remaining there is usually a pay on death benificiary. Prior to 1/1/2020 the law said that you would take age 86 (some version of life expectancy) minus the age of the benificiary and then divide the deferred funds by that number and the results was the dollar value that had to be withdrawn that year. It was meant to prevent untaxed savings to merely pass from generation to generation. So if a couple has $1 million in savings and tragically passes with one 30 year old child then the child would have to withdraw 1/56 (86-30) of the funds in the first year or $17,857. Each year the calculation would change based on him being a year older. No problem.

Well the new law that went into effect 1/1/2020 says that if the same situation occurs as described above that the benificiary now has 10 years to withdraw all the money. So their taxable income on receiving the retirement dollars goes from $17,857 a year to $100,000 a year. And the government gets a much larger chunk of the money via taxes. This was not a partisan political move either as it came out of the house to the senate with only something like 6 dissenting votes. All the folks in Washington agreed they wanted a much larger slice of the pie. Oh and if you say what the heck I won't take it out, remember this. The penalty for failing to take a RMD (required minimum distribution) is 50% of the amount you were supposed to take.

You should join us on the FIRE thread, over on the Budget Board. We talked about this. While DH and I are still a few years from retirement, it definitely impacts how we're looking at retirement/estate planing. Assuming things go as we think they will, our kids will be inheriting from us at the same time that they're hitting peak earning years, so inheriting IRAs that they MUST drain in a certain amount of time could be painful.

There have also been some spirited discussions on this subject, over on Bogleheads. There, the consensus is: (1) Do Roth conversions, as much as you can stand, and (2) have your kids wait 9 years and 364 days, to get the maximum tax-deferred growth. Which doesn't help the 10-year tax hit, for sure, but, growth is growth.

And of course, who knows how Congress is going to change the laws, further on down the line...
 
I will have to check on this as I continued my mom's IRA distributions at the same rate she was withdrawing them at. I suspect my financial adviser will let me know. I also wonder if since she passed away 7 years before the law changed if I am grandfathered.
The original idea of both IRAs and 401ks was to protect money from taxes until it was withdrawn. Over the last 40 years they have gradually reduced the tax deferral. Apparently too many people are stashing too much money into tax deferred programs, which is funny based on all the reports on how little people are saving.
Also, thinking aloud here, it makes me wonder if Congress will try and find a way to tax Roth 401k's and Roth IRAS.

My suspicion is that one day, they'll at least attempt to tax the growth in Roth accounts. Especially if you look 20-30-40 years down the line, people are going to have large amounts of growth on comparatively small initial investments. No politician likes to see a pile of money that isn't taxed.
 


I will have to check on this as I continued my mom's IRA distributions at the same rate she was withdrawing them at. I suspect my financial adviser will let me know. I also wonder if since she passed away 7 years before the law changed if I am grandfathered.
The original idea of both IRAs and 401ks was to protect money from taxes until it was withdrawn. Over the last 40 years they have gradually reduced the tax deferral. Apparently too many people are stashing too much money into tax deferred programs, which is funny based on all the reports on how little people are saving.
Also, thinking aloud here, it makes me wonder if Congress will try and find a way to tax Roth 401k's and Roth IRAS.
If you were taking withdrawls prior to 1/1/2020 under the old plan then you are grandfathered in. If you are taking the withdrawls at the same rate your Mother was then that might be okay as well. The formula for withdrawl rates of someone who has attained the age of 70 1/2 are different than for someone who has inherited the deferred savings so you just want to make sure whatever rate you are withdrawing at meets the RMD rules.
 
If you were taking withdrawls prior to 1/1/2020 under the old plan then you are grandfathered in. If you are taking the withdrawls at the same rate your Mother was then that might be okay as well. The formula for withdrawl rates of someone who has attained the age of 70 1/2 are different than for someone who has inherited the deferred savings so you just want to make sure whatever rate you are withdrawing at meets the RMD rules.
That's what my Financial Adviser does. They are up to speed on everything. The amount I take out fluctuates from year to year, but not by more than about $50.
 
If you were taking withdrawls prior to 1/1/2020 under the old plan then you are grandfathered in. If you are taking the withdrawls at the same rate your Mother was then that might be okay as well. The formula for withdrawl rates of someone who has attained the age of 70 1/2 are different than for someone who has inherited the deferred savings so you just want to make sure whatever rate you are withdrawing at meets the RMD rules.

Good to know this. My father-in-law passed away last year and left us an inherited IRA as well as an inherited TSP. We took our first RMDs in 2019 and these were based on my husband's age of 57 at the time. Neither amount was very large.
 



GET A DISNEY VACATION QUOTE

Dreams Unlimited Travel is committed to providing you with the very best vacation planning experience possible. Our Vacation Planners are experts and will share their honest advice to help you have a magical vacation.

Let us help you with your next Disney Vacation!





Top