How to avoid taxes on an inherited 401K?

Question

My mother in-law passed away and there will be a a 401k and possibly a a piece of the property that we may inherit.

I’m curious if there is a way to roll the 401k into a self directed Ira to avoid tax benefits then use the self directed ira to invest in property’s.

Is there any other avenues that someone might use to 1. Avoid taxes. 2. Have a mind toward using it in real estate investments?

Juan Deshon · Answer

You can roll into a self directed IRA. You won't avoid taxes because the government will require you take a certain amount every year (Ask your CPA). However it can be done. As Trent mentioned, you can most likely fulfill the distribution requirement with the cash flow of the property if there is any. I would encourage speaking to someone about it that works with inherited IRA's, rules have also recently changed for inherited IRA's inherited from someone who passed away after Jan 1 2020.

Brian Eastman · Answer

@Trent Vick  The inherited 401k could be rolled into a self-directed IRA.  There would be no tax implication in the transition, and the self-directed inherited IRA could be invested into real estate.  You will be required to take a minimum amount of taxable distributions from the IRA annually, and can likely do that from earnings on the real estate without needing to worry about liquidating the plans investments.  You will want to take a careful look at that math.

Trent V. · Answer

@Derreck Long it would be great to get in touch. What do you mean by RMD I have not heard of that acronym.

Derreck Long · Answer

I am sorry to hear about your lost. I had something similar happen with my fiance, and we where able to work with an expert by the name of Rebecca Miller. She showed us how to move the funds and the assets into a Self-Directed IRA, helped us avoid taxes, and even walked us through several options for RMD related issues (which most people forget about). If you would like me to email you her contact information please let me know. She was truly helpful.

Trent V. · Answer

Thanks for the responses. We are going to take a small chunk and add that to what's left of our revolving debt. Car and credit card will be paid off. Then we are going to max out a Roth IRA. The rest will be put in a self directed IRA. The self directed IRA is nice because my understanding is that you could use the money for virtually anything although it will count as income on each dispersment. I am very tempted to invest the rest right into a rental property but I think it will be wiser to keep this as a capital expense backstop and save the rest of from my w2 job for a initial investment in a property. Thank you for the feedback.

Holly Williams · Answer

@Trent Vick sounds like you have a w-2 job.  I have an inherited IRA and the only way I have been able to avoid taxes is by offsetting the gains with losses.  Mine is only $100k or so and I am only required to take out 6-10k so it’s not bad.  It is indeed bullshit though. Talk to your CPA, I don’t think you can even roll it over.  The government wants their money.

How to avoid taxes on an inherited 401K?

Most Popular Reply