I recently had a client call my office and their mother passed away. This woman was a great saver. She amassed a great amount in her employer’s retirement account. My client did not know what to do. He was told from her 401k administrator that if he cashed out her retirement funds, he would only pay 20% in taxes. I told him THAT IS NOT THE WHOLE STORY!!!

The truth is he would pay 20% today. What they do not consider is your personal issues or lifestyle. The 401k administrator failed to inform my client that the amount of money received would categorize him into a 39.6% federal income tax bracket. California tax of 11.3% and Medicare supplement tax of 3.8%. Which he would be responsible for when he filed his taxes.

39.6% federal tax+ 11.3% California tax + 3.8% Medicare tax= 54.7% IN TAXES

This means if he started with $500,000 only $226,500 would end up in his pocket.

I asked my client “Did the GOVERNMENT save harder than your mother for this money?” He said No!!! So then why are they receiving more than her family? He said I don’t know. I responded, “Do you want to give them half.” His response was Hell no!!!!

I told him there was a way we can save a boatload of cash and avoid paying the GOVERNMENT so much. The way we can do that is with inherited IRA. He asked, “What is that?” I told him an inherited IRA allows you to rollover your mothers 401(k) to IRA in your name.

Since his mother never paid taxes on the money the GOVERNMENT wants you to take out annual withdrawals from the account called Required Minimum Distributions (R.M.D.). The amount the government is requiring is based on your age. Since my client is 40. They are requiring him to take around 2% of the total balance.

This means if you started with $500,000 only 2% is taxable= $10,000

15% federal tax + 4% California tax = 19% IN TAXES

In other words starting with $10,000= $8,100 in your pocket

My client said, “WOW I saved over 35% in taxes”. He wanted to know if he could take out more. I replied, “YES, as long as it’s within your income bracket.” He said, “Great let’s do it.”

When we receive a large amount of money it is important that we pause and take a deep breath. Meet with our trusted advisers who can help us save money from the GOVERNMENT but also save ourselves from making a huge mistake.

Thanks for reading! :) If you enjoyed it, hit that heart button below. Would mean a lot to me and it helps other people see the story.

Jason Matthews

President/CEO Matthews Financial & Insurance Solutions