I'm 70.3 yrs old & must take distribution from 457 Retiremt Plan. How best to take it & pass to kids at death

Question

I am almost at the mandatory required age to take distribution from my 457 Deferred Compensation Plan (city government retirement plan) otherwise I have to pay a penalty. What is the best way to take it to preserve my asset and pass it down to my children after my death, and not create a tax problem (meaning Uncle Sam gets a big chunk instead of my children at my death). Thank you all.
Jimmy

Answer 1

Jimmy, go see a financial planner, lawyer, or CPA who specializes in estate planning. You need more information and expertise than you're likely to find here. Besides, without knowing a lot of personal information that you shouldn't disclose here, nobody here will be able to give you good, solid advice that you can trust and act upon.

Answer 2

You do understand that a tax-deferred account, somebody has to pay the income tax? Right?

If you don't withdraw the money before you die, the income tax still needs to be paid *after* you die. If you are in the 15% or lower tax brackets, you should consider taking *more* of the money than the minimum required distribution. Once the taxes are paid it's money like any other money. To shrink the size of your estate (assuming the $2M estate exemption isn't enough), you can gift up to $12,000 a year to your children to get some money out of your estate.

If you leave the account to your estate, the estate will report the income on a 1041 and either pay the taxes then (tax rates jump quickly to 35%) or pass the income and the tax bill through to your children (presumably they are in the 15% or higher tax brackets).

If you leave the account to your children, they will include the income on their 1040 returns when the get the money. Unlike IRAs, there won't be any way to "stretch" money coming directly from a 457 over several years. (You can move the 457 money to an IRA under certain rules.)

In all cases, the value of the retirement plan is part of your estate (form 706).

Answer 3

First, you will pay the taxes now. My financial advisor suggested a certain type of investment guaranteeing a minumum of 6% return and capital preservation. Take the money out and put it into something like that. Save what you have and earn for yourself at the same time.

If you can't find anyone with a plan like that, contact me and I'll tell you what financial group it was. I'm in engineering and let the pros handle finances.

Answer 4

You might want to ask a financial advisor in your jurisdiction regarding laws but usually putting it right into a trust avoids the taxation problems.

Answer 5

If you can dump money into it, start a foundation...

Talk to an attorney on how to create one.