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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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Im trying to decide what to do with a retiree death benefit.

Resolved Question:

I'm trying to decide what to do with a retiree death benefit. I would like to use half to 3/4th of it now (and I understand about the 20% witholding), and place the rest of it in an "inherit" IRA. My question is what is the best decision tax-wise - placing all of the money in the IRA and withdraw it from there or only place the portion I want to stay in the IRA in the IRA?
Submitted: 5 years ago.
Category: Tax
Expert:  Lev replied 5 years ago.

LEV :

Hi and welcome to Just Answer!
Inherited funds in retirement account are taxable upon distribution. In additional - because distributed money are added to your other taxable income - you may be pushed into higher tax bracket; your adjusted gross income will be higher and that may affect other deductions and credit that you normally use.
Generally spreading distribution over several years might be preferable - however to be précised - you need to estimate your overall tax liability before taking a distribution.
There is no penalty on distribution of inherited retirement money - so generally the administrator withholds 10% to cover possible tax liability unless you specifically asking to withhold more.
Your actual tax liability is determined at the tax time based on your total income, filing status, deductions, etc - it might more or less than withheld amount.
You definitely may take out as much money as you need - Let me know if you need help to estimate your tax liability.

Customer:

I would like help estimating my tax liability. My annual income is $65K and I would like to use $34K from the death benefit right away (to pay off debt and for a 1st time home purchase). The other money I would like to place in an IRA.

LEV :

Sure - I will help you with estimations...

LEV :

Please clarify - did you inherite the money from 401k plan?
What is your filing status? Single?

LEV :

Are you below or above 65?

Customer:

My filing status is single. The money is from a retiree death benefit, so I don't believe it is a 401K.

Customer:

I'm 28.

LEV :

"retiree death benefit" - is that from life insurance? - who pays these benefits?

Customer:

My father's company pays. It is like life insurance.

LEV :

Assuming you are using standard deduction - with wages income $65,000 - your estimated tax liability is $9700.
With additional taxable distribution of $20,000 - your tax liability will be $14900.

LEV :

That means - additional taxable income of $20,000 will resuld in additional tax liability of $5200.

Customer:

But with the taxable distribution of $34K, what would my liability be?

LEV :

If you are single, with income from wages $65,000 plus taxable distribution of $34,000 - your estimated federal income tax liability would be $18,800.
If you plan to purchase a home - I suggest to do distribution in 2012 and purchase a home at the beginning of 2012 - in this case - you will itemize your deductions - including real estate taxes and mortgage interest for the whole year - so your tax liability will be partially offset by larger deductions.

LEV :

Please be sure to accept the answer. Experts are credited only if the answer is accepted.


 

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