Affluent retirees over 60 are increasingly emptying traditional 401(k)s first to minimize heirs’ tax burden, a strategy that hinges on complex tax rules. The figure that matters: a $250,000 traditional 401(k) withdrawal taxed at 24% leaves $190,000, while the same Roth amount comes tax-free.
The Tax Risks in Splitting Assets After 60
Retirees over 60 face a critical choice when dividing wealth: traditional 401(k) withdrawals are taxed as income, while Roth accounts offer tax-free growth. The key risk lies in heirs’ tax brackets. A $250,000 traditional 401(k) inheritance taxed at 32% costs $80,000 in taxes, versus zero on a Roth (247WallSt). The strategy: spend taxed money first, leaving tax-free assets to heirs.
By the Numbers: Withdrawal Strategies
A 64-year-old with $950,000 in a traditional 401(k) and $250,000 in a Roth can withdraw up to $243,600 annually before hitting the 24% tax bracket (247WallSt). Medicare surcharges add $2,297 yearly above $218,000 in income. Converting traditional IRA funds to Roth in low-income years can lower tax rates on transfers (Yahoo Finance), reducing future required withdrawal balances.
What It Means for Investors
Affluent retirees must balance current tax brackets, Medicare costs, and heirs’ future tax rates. Roth conversions during lean years can reduce taxable balances, but large conversions may trigger Medicare surcharges. The bottom line: a tax-aware withdrawal strategy preserves more wealth for both retirees and their heirs. Consult a financial advisor to navigate these complexities.
Sources
- Why Affluent Investors Over 60 Are Emptying the Traditional 401(k) First and Leaving the Roth to Their Kids
- Roth Conversions in Low-Income Years: The Retiree’s Window Before Required Distributions Begin
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