My father makes after-tax contributions to his 401(k). Should he take these as his RMD or leave them for his beneficiaries?

By Vig Varun

'My father is a widower, so any beneficiary would be a non-spouse'

Dear Quentin,

I have recently become the power of attorney for my father. In reviewing his documents, I found that he had been making after-tax contributions to his 401(k) plan all these years.

I know that nowadays you would put those after tax amounts into a Roth 401(k), but he never did.

He has now reached the age where he needs to start taking the RMDs from this account.

Do the rules allow you to take those funds and have them transferred into a Roth 401(k) or a Roth Rollover IRA?

My father is a widower, so any beneficiary would be a non-spouse.

Which is better long term, taking the after-tax money as his required minimum distribution (RMD) or leaving the after-tax funds in the account for the beneficiaries?

Avoiding the After-Tax Man in New Jersey

Related: The IRS audited my husband's 2021 tax return and, yes, he made some mistakes. Now it wants two years to look at his 2022 tax return. Is this normal?

Dear Avoiding,

Making after-tax contributions is not as unusual as some people might think.

Let's start with the not so-good news. Unfortunately, the RMDs must be taken in cash and cannot be rolled over to a Roth 401(k) or IRA account.

Taking the money now versus later involves a careful analysis of facts and circumstances of your father (taxpayer).

For example, some considerations include current marginal income tax bracket, cash flow requirements, charitable inclination, etc.

Qualified charitable distribution

If your father is charitably inclined, one of the preferred uses of RMD is to make a QCD (qualified charitable distribution).

QCDs help reduce both income taxes and AGI (adjusted gross income). Currently the annual QCD limit is $105,000.

For non-spousal beneficiaries of an inherited 401(k), the 401(k) must be depleted within 10 years after the original owner's death.

As MarketWatch columnist Beth Pinsker told another reader: "Try taking a step back and looking at the big picture. Guide your actions based on your goals, rather than the taxes involved."

She has spoken to many experts about Roth conversions, and they always come up with the same conclusion: "Don't let taxes drive your money-management decisions," she said.

Generally, it's best to withdraw over 10 years to minimize the tax impact but it depends on beneficiaries' facts and circumstances.

Happy tax savings.

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09-18-24 0954ET

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