Is it worth withdrawing IRA to contribute to 401k as self-employed?

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  • #91208 Reply

      I inherited almost $1 million in an IRA and my accountant/financial advisor suggested withdrawing money annually to put into my 401k (as a self-employed individual). They also recommended adding my spouse as an employee, contributing the maximum of $30,500. This seemed logical initially since they claimed it would save me around $8,000 yearly in taxes; however upon further examination, expenses like Medicare, social security & payroll costs near $7,000 per year leaving only about $1,000 actual savings which feels like too much effort for little reward. Am I missing something?

      #91209 Reply

        Inheritance should stay in your name only. Heaven forbid something happens to your marriage, you are out any money put in their name or splitting any money mixed into marital assets. Please keep anything you roll out in your name only just to ensure it says yours, which was the intention of the person who gifted it to you.

        #91210 Reply

          It’s a good strategy. You must take the money out of Ira within 10 years. By also contributing to 401k the income is offset by the deduction. Yes, you have payroll taxes but they will increase your future social security income.

          If you don’t do the 401k you still have to take $1 million out of inherited Ira in next 10 years and pay tax.

          Would you also like to explore: My Roth IRA has never made money

          #91211 Reply

            Can someone show me where this is possible. An inherited IRA only has one way of dispersing, withdrawals. (Unless it’s your spouses IRA that you inherit. Then you can roll it into your IRA.) otherwise money must be drained from that account in the next ten years.

            #91212 Reply

              Although it’s not a really efficient way to save/plan for retirement, the social security taxes you’re paying are helping to increase what your spouse can draw in retirement, so there is some additional savings there.

              #91213 Reply

                Sorry for your loss and congrats on getting a life changing amount of money. There is a lot of bad advice here already. You might consider getting professional second opinions from a paid adviser. There are lots of variable that we don’t know from your post that could and should change the advice given. Good for you for taking your time and thinking through this. And there are many smart people contributing on this thread, you get what you pay for.

                I’d have a hard time telling you if that’s a good strategy without understanding what you do for a living as a self-employed person, how much you make, how much the business brings in overall, heck, I don’t even know how old you are or whether you have money put away anywhere else.

                What’s your goal for retirement? Do you have debts that need to be paid off? Charitable inclinations?

                Take your time. Get good advice. It could make a huge impact in your life overall.

                Also, check out: How does the IRS “know” that SEP IRAs are being funded by employer contributions?

                #91214 Reply

                  Inherited retirement account assets must be depleted (withdrawn) within 10 years of the death of the owner. If the owner was taking RMDs at the time of death you must continue distributing at least as much each year as the RMD schedule requires.

                  What you use that money for is up to you. But using it to make the most of your own retirements account contribution options makes good sense. Using it for your wife’s a little more complicated question. At a minimum you should probably fund a spousal IRA.

                  Does she already work in your business? If so, does she receive any income? If not, could you split off some of your reported income and report it as hers?

                  The two of you just need to have enough Schedule C income to cover $46,000 in contributions combined. Of course I’d also probably prefer to pay self-employment taxes up to the second bend point as well if neither of you are having FICA taxes withheld from another job. The first two bend points tend to provide the most return on Social Security taxes in retirement.

                  #91215 Reply

                    I would guess, The advice is based the fact that you have about 10 yrs, maybe 15 I forget, to withdraw all of the money out of your inherited Ira into a vehicle of your choosing. So, your advisor is proposing the least painful way to do that, without knowing your specific needs.

                    If you need more per year, tell him/her so.

                    #91216 Reply

                      Your accountant is wrong. You can’t put inherited ira distributions into a 401k or any other retirement account. If that was true why take out money from an IRA and pay taxes and then defer the taxes again by putting them into a 401k so you can only pay taxes at some time in the future?

                      Makes no sense.

                      #91217 Reply

                        If it’s an inherited IRA you have to pay the taxes within 10yrs. (Unless you are the spouse of the owner) You can do it up front or each year and let it grow then rip the band aid off at the end. This the new standard for inherited IRAs.

                        Your financial person should have told you this to avoid penalties.

                        Explore these too: Is a SEP-IRA the best way to go for a retirement fund for the business?

                        #91218 Reply

                          Can you just pay the taxes and put it somewhere already? Seems like a hassle. You’re still young and once you park it, it’ll compound interest for years and be a great nest egg.

                          Ask the advisor about it.

                          #91219 Reply

                            Ramsey Solutions has a break down of this on their website as a keyword search. Should give you some helpful tips to make the right decision.

                            #91220 Reply

                              OP, this sounds like a reasonable plan. But if you’re looking for a second opinion it’d be worth getting one from someone who is a fiduciary and specializes in tax efficiency strategies. We’re all strangers on the internet so unless a commenter wants to put their hand up and volunteer advice who is also a fiduciary, you might have to pay a little money, a few hundred bucks for an advice call, for that second opinion.

                              Sounds like it’ll be worth it in the long run.

                              Good luck.

                              #91221 Reply

                                That strategy makes sense! I also get the hassle vs payoff argument, but I guess it comes down to how much of a burden is adding the extra benefits? If not much, look at it the other way: would you rather have a tax bill that is a net $1,000 higher?

                                Unwinding big traditional IRAs where you’re a non spousal bene can be tough to do tax efficiently.

                                Great question, thanks for posting!

                                Have you seen: Looking for insight on IRA contributions and back door conversion to Roth

                                #91222 Reply

                                  Open a self directed Roth IRA, and there may be a strategy for self directed 401k but not fully invested in the stock market. At some point you might be able to back door future distributions into that SDIRA Roth in the end state.

                                  See Mark J. Kohler on YouTube and reach out to him for outside the box thinking and investing.

                                  Everything starts with a revocable living trust

                                  There may be trust there with the family advisor, but there are absolutely better paths the he may not know of or share…

                                  Wishing you the very best with the blessing and sorry for the loss

                                  #91223 Reply

                                    Is the inherited IRA from a spouse? If not you have no choice but to draw it down within 10 years…. Now the question I immediately have, why would you take that money out of the Ira (assuming it’s a traditional), pay taxes on it and then put it in to your 401k? Also, is the amount the are recommending you put in actually reflective of your earned income (you can’t for example put 20k in to a 401k if your business only made 10k). Adding your spouse would mean actually employing them, which not saying isn’t possible, but they need to do an actual job and be compensated appropriately, and again, does the job they would be doing allow you to contribute that much to their retirement? Also bringing me back to why would you pay taxes, to contribute to a tax advantaged account?

                                    The whole thing unfortunately sounds like a good idea in theory, but in real life likely doesn’t pan out. I’d recommend some other opinions before making decisions. Feel free to message me, I’m a financial advisor and handle a lot of estate and tax strategies. Not saying you need to work with me or anything, but I could potentially at least give you some ideas

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