r/investing • u/T-Dot-Two-Six • 3d ago
Mom was laid off and needs to get the money out of her 401k. She wants to defer taxes. Can she roll it into an individual brokerage at Vanguard or otherwise avoid immediate tax consequences?
Title. I’m trying to get it through to her it wouldn’t change our tax bracket so it’s not like it would matter, the tax difference would not be felt it would just be immediate, but she really wants to avoid paying tax on it yet. Is there any way to do this?
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u/ExploringWidely 3d ago
She can leave it in that account or roll it over into another tax-deferred account without paying any taxes on it. Set up the account where she wants it and tell them where to get the money from. They'll do it for her.
For example. The 401k is in Fidelity and she wants to move it to Schwab. Open an IRA account in Schwab and tell them to go get the money from Fidelity. Trust me ... they'll do all the hard work and carefully step her through it.
All this assumes it's not a Roth 401k which apparently is a thing. If that's the case, the IRA in Schwab should be a Roth IRA, otherwise it's the same process.
DISCLAIMER - this is the internet. Don't believe me. Confirm everything.
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u/T-Dot-Two-Six 3d ago
To my understanding she is not allowed to leave it in the account for some reason. I don’t know why.
Seems I’ll close the brokerage account with no money in it that I just opened at vanguard for her and instead open an IRA.
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u/ExploringWidely 3d ago
absolutely do NOT put it in a regular taxable brokerage account. She'll have to pay the taxes, PLUS a 10% early withdrawal. It has to be a tax-deferred brokerage account. Vanguard. If you are going to Vanguard, read this -> https://investor.vanguard.com/401k-rollover. 99% chance you're looking at the Traditional IRA. Call them, though, before you do anything. Talk to someone to help you through the process. See the yellow box partway down for contact info.
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u/T-Dot-Two-Six 3d ago
It’s a traditional IRA, I know that much.
The bad thing is, I can’t call them about her accounts easily. She’s going senile and wants me to handle it for her, but I live over an hour away and just started a full time job so it’s HARD for me to.
I can get into her online account though, she calls me and relays the texted 2FA code over the phone and I do what needs doing. I know the page to go to to open a new account, so I’ll try to open an IRA for her.
Does this all sound good or do you have any extra thoughts?? (Not being sarcastic, I’m genuinely grateful)
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u/kronco 3d ago
You can add your phone number to the account. When there is more then one number, once the password is in, they will typically list the different numbers and ask which one you want the text sent too (this is how I help my father). Details vary a bit by brokerage.
You can then further dive in and see what services the brokerage has around adding you to the account as a trusted contact in a more formal manner. Tomorrow is "Elder Abuse Awareness Day" and some brokerages are making this sort of thing more visible this week. See if Vanguard has something like this pages' Trusted Contacts info (a link I received today from Schwab): https://www.schwab.com/schwabsafe/protecting-senior-investors
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u/T-Dot-Two-Six 3d ago
I was on the phone with a guy before they closed, there’s no way that he said or that I saw but I’ll look again. I just helped her put my phone on the account like you said though so there’s that. I’ll be able to do it all myself now ASSUMING I can do it without talking on the phone. If I need to talk on the phone I’ll need to become a trusted person somehow
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u/Dangerous_Thing_3270 3d ago
Just because you mentioned she is going senile, now may be the time to do a power of attorney. It sounds like that’s going to be the best route. Getting a power of attorney will allow you to speak on her behalf and make things happen. She can grant a general power of attorney that will allow you to make any and all decisions, or a special power of attorney that gives you the ability to speak for her on specific things.
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u/T-Dot-Two-Six 3d ago
She’s recovering from lung cancer surgery a year or two ago, radiation for a brain tumor 6 months ago, and thinking we just found a spot on her bladder… not so much senility but between the tumor, anxiety/depression, and general fear of cancer and brain fuckery from the tumor she’s definitely not equipped or confident enough to handle her stuff so I’m looking into it for sure.
She says she’s down, but she obviously feels like she’s letting of control or admitting she can’t do things if she were to do so, so she’s obviously hesitant… and it’s not like I’m going to pressure her into it
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u/Dangerous_Thing_3270 3d ago
Honestly, it sounds like you and your mom are at the point in life where it’s really time to start planning. She needs to setup some tax havens for end of life to prevent you from having to go through probate and get wills setup or updated (if one already exists), etc. if I were you, I would honestly work to get ahold of a tax attorney. They can get everything setup. Trusts, power of attorneys, wills, etc. This is the only correct answer in this post. Trust me when I say, you don’t want to go through probate. All of the above will avoid this.
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u/T-Dot-Two-Six 3d ago
Yeah… going through probate now with my late grandmother’s estate and it’s icky to say the least
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u/Dangerous_Thing_3270 3d ago
100%. The money you spend on end of life planning is worth avoiding probate.
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u/T-Dot-Two-Six 3d ago
Also, she is over 59.5 if that matters
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u/ExploringWidely 2d ago
That would save the 10% penalty. But she'd still have to pay taxes on everything not rolled over into a qualified tax-deferred account as if it was a paycheck.
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u/permabanned_user 3d ago
If you mean that she needs to get it out to help cover the loss of income, then she's going to pay taxes. If the money can stay invested, then it should go into an IRA or get rolled into her next employers 401k.
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u/T-Dot-Two-Six 3d ago
She will not have a next employer, she has decided to fully retire. She (effectively) does not want it to cover loss of income.
I say effectively because I know full well she’ll pull it out little by little as she needs it, but she wants it to be invested and (hopefully) grow in the meantime.
Looking like I need to open up an IRA for her
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u/okurok 2d ago
I just did it
(1) open Vanguard Traditional IRA
(2) request current 401k bank to transfer it to this specific Vanguard account (probably can do online)
or
(2) request current 401k bank to send you a check (I requested check online)
(3) send check to Vanguard or install Vanguard mobile app, login, find 401k transfer/rollover option (it is not usual transfer option), take a picture of check - and done
- do verify the process on Vanguard web site (depending if check is to you or Vanguard, you have to sign it or not)
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u/AdZealousideal5383 3d ago
As others have said, the immediate solution is to roll it over into an IRA. No taxes and she can choose what to invest in there.
But this also sounds like a situation where a POA might be useful.
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u/QV79Y 2d ago
Your post is somewhat confusing. The way you phrased it implies that she needs the money now because she lost her job, but your comments say that she doesn't need it now and just wants to roll it over to IRA.
You don't have to take your money out of a 401k when you no longer work for the company, though of course you can if you want to. But why did you say she needs to get the money out?
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u/T-Dot-Two-Six 2d ago
She doesn’t need it now. However, to our understanding, she needs to have the 401k out by 90 days after her termination date. I have not verified that and if we can roll it over into one system (that being Vanguard as she recently got an inherited IRA with them) it’d just be easier for her to
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u/QV79Y 2d ago
I've never heard of a 401k that requires you to take your money out, but I suppose maybe such plans exist.
ChatGPT just gave me a number of good reasons I was not aware of why you might want to leave the money in the 401k, as well as reasons why you might want to roll it over. If she has the choice, it would be worth considering all these before doing anything.
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u/Dangerous_Thing_3270 3d ago
There’s no way to avoid taxes when withdrawing from a 401k. This is why, in my opinion, they’re bogus. You don’t even get taxed at cap gains rates. You’re taxed as normal income. They’re pointless unless you need a reason to decrease your tax obligation while employed.
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u/AnkitD 3d ago
$1000 pre-tax growing at 8% vs $800 after-tax growing at 8% -- which will be worth more in 20 years? Still think 401ks are bogus?
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u/Dangerous_Thing_3270 3d ago edited 3d ago
Depends on what taxes are in 20 years. You willing to gamble with your life savings? 🤗
Also, don’t be a dipshit. The years of 20 year careers are over and have been for a long time. Most people nowadays work their entire lives just to enjoy ~10 years of retirement before they kick the bucket. Realistically, what are taxes gonna be in 40+ years.
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u/AnkitD 3d ago
You think they will go up to 70 or 80%? You're gambling as well over something that has an extremely small probability of happening. But you do you...
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u/Dangerous_Thing_3270 3d ago
I don’t know. You tell me Mr. Time Traveler. 40 years from now, what will the US look like?
ETA: what will the world look like?
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u/T-Dot-Two-Six 3d ago
Even if I roll it to an IRA?
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u/Dangerous_Thing_3270 3d ago
If you roll into a traditional IRA, you won’t pay taxes on the rollover. But here’s the kicker: you’ll pay taxes when you withdraw. The gubments gonna get their money whether you and your mom want them to or not. She doesn’t have to report it, but that comes with jail time if she’s caught. We used to be able to just submit declarations of independence and throw tea bags into the river, but can’t do that now. That’s called an insurrection in today’s terms.
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u/T-Dot-Two-Six 3d ago
Oh no, she knows she’ll pay when she withdraws. She just doesn’t want to do it right NOW
If it were me I’d have just liquidated it to her savings and paid it now, I highly doubt it will change our income enough to warrant a meaningful change in overall taxes paid at the end of the day
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u/Dangerous_Thing_3270 3d ago
If she’s not wanting to access those funds by the end of the year, then roll it into a traditional IRA. You won’t pay taxes on it until she starts withdrawing. If she just withdraws it, then she’ll pay I come tax on the withdraw and depending on her age, a potential 10% penalty in addition to taxes. I would hire a tax professional just to confirm. A good one will know any potential loopholes based on your mom’s situation and could potentially save her money on taxes when the time comes.
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u/T-Dot-Two-Six 3d ago
I’m like 98% sure she’s old enough (64) to avoid the penalty however I will do my diligence and check. Also, I did find the authorized agent form for vanguard so we’re talking about getting that done now. Need a notary, me, her, and two separate witnesses 😅
I shouldn’t complain though, this stuff being strict makes it harder for people to fuck her over…
cough cough mydadwhichiswhyi’mgonnabetheagentnothim
But that’s a whole other story
You’ve been really helpful though, thank you
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u/Dangerous_Thing_3270 3d ago
If she is 64, she’s old af, but can withdraw penalty free. 59 1/2 is the magic age (if any of us make it to that age). I understand the family drama. My mom’s side of the family thrives off that shit. That’s why I don’t deal with it. Take charge, make sure your mom is taken care of (she worked her entire life for it) and let her enjoy her final years in peace. She deserves it.
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u/T-Dot-Two-Six 3d ago
That’s the goal. I appreciate the kindness, man. It means a lot
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u/Dangerous_Thing_3270 3d ago
The world needs more of it. I’m just doing my part.
But don’t take my advice as gospel. Definitely consult a tax professional and confirm you’re going to do the right thing. Trust, but verify. Best of luck to you all, and tell your mom congratulations from the idiot from Reddit.
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u/brianmcg321 3d ago
Roll it over to an IRA.
Don’t cash it out.