| Inherited 401k and house w/mortgage- what to do? |
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Orphan15
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| Inherited 401k and house w/mortgage- what to do? |
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Hi Everyone,
I recently lost my mom unexpectedly. Putting aside the emotional aspect, I have some financial decisions to make.
Here's my situation: I'm married, with one 17 year old and one 20 year old from a previous relationship- their father is deceased. I receive survivor benefits for my daughter which cover the utilities and some necessities. I own and live in a duplex that I bought before my current marriage. I rent out the other side, which covers my mortgage. I owe about 200,000 on the house, which is about equal to its value, so there's no equity. Other than that, my husband and I make very little money. I work part-time and my husband is an independent contractor (painting houses) and has a small business selling auto parts. This October, the survivor benefits for my daughter will end, leaving me with approximately 35% less income than now.
My mom left me a 401k with about $220, 000 in it. I am her only child. She also leaves a house that has a mortgage of about 90,000, plus a home equity line balance of about 20,000. There is credit card debt of about 30,000. Therefore , total debt is about 140,000.
My initial thought is to pay off all the debt my mom left including the mortgage, so I would own her house outright. We would then fix it up, move there and rent out the other side of my duplex for $1200 profit each month. My mortgage has a very low interest rare so it makes sense to keep it.
My concerns are the tax penalties on withdrawing the 401k, and whether it is wise to spend nearly all of the money on house and debts.
Would it be wiser to pay off half the mortgage assuming I could even get financing for the rest with my very bad credit? And if I did pay off my mom's house, would putting it in trust for my kids protect it or save any tax penalties?
Thanks to anyone who is able to sort through this endless post and give me their opinion!
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Sat Feb 21, 2015 8:59 pm |
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GardenCat
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Whew, a lot going on!
I am sorry for your unexpected loss!
I am not a lawyer, only speaking from personal experience of myself (mother passed) and my wife (father passed), and some training as a credit certified counselor.
First, are you the executor/tress of your mother's estate? If so, any and all attempts to get paid for her outstanding debt(s) will come to you/through you.
You are in Mass? Is that a "probate" state? I assume your mother had a will and things are in order? Do you have a lawyer handy if things get weird?
Are there any bank accounts that are POD (payable on Death) and are you the recipient? If so, that $ is yours now, and you should have immediate access (you may have to show a death certificate).
The House: If you inherited the house through your mother's will, then your "value" for the house is the appraised value when she died (again, sorry...). If you have not done so already, get an appraisal. This valuation will be your base - it is the "stepped up" value, not what your mother paid when she purchased it. This is important because if/when you ever sell the house you will have to pay Capital Gains Tax on the increased value from when you received the house to the time you sell it, and you don't want capital gains from years ago when your mother purchased it, which would likely be much more.
The House, again: Figure out the status of the mortgage and the equity line of credit. The lenders may (again, may, not necessarily will) want to "call the loan" which means you would have to pay it off, or enter into serious negotiations to avoid the sale of the house. You may be able to re-fi the mortgage and line of credit into one fixed rate, 30 year mortgage, based on equity in the house. Worth a try, especially if you are not already in debt. It may help if you can show that you have a good history of being a landlord with your duplex, and can make the entire duplex be positive cashflow.
House #3: You don't want to put the ownership of the house in your children's names, as their valuation would be based upon today's value, not the stepped up valuation that would occur when they get it when you pass away...which could be much much more money that could be taxed.
The 401K: If you are the beneficiary of this retirement fund, I believe the money is now yours and that you could get access to it if you want. ALTHOUGH there are quite specific IRS rules about how an IRA or any retirement fund is inherited. You may have to start taking "required minimum distributions" from this account, annual distributions based on your age and life expectancy. You may want to consult a tax accountant as this is pretty significant $ and you don't want to screw up anything and have to pay taxes and penalties.... Probably best if you don't touch this $$ until you know what your options are and what the tax implications are. You may want to DIRECTLY "roll over" this $$ into an IRA type account without taking possession of even a check for the $$ (the $$ would go from your mother's 401K directly to your account, say with Vanguard...).
Debts:
1. Credit card debt may be tricky. If the cc is/was in your mom's name only, then the debt is/was hers. The cc company/bank cannot come directly to you for payment, but will likely come after the "estate" to get paid, and you as the executor. They may want all the money "now". This is where the advice of a lawyer may be very helpful as to the status of the house...is it a part of your mother's estate? (likely)(even though you now own it?). Cc companies can be very pushy, and you need to know your status and rights. My wife's father had nothing of value so the cc companies had nothing to go after. My mother had very little debt and we just paid it off from her bank/savings accts. Both were pretty easy.
In General:
You may want to think about setting yourselves up a bit if you have the funds and the chance. I say this because of what you say in your post about making very little money. This could be your opportunity to create an emergency fund, establish some retirement fund for yourself, and take a good financial breath.
Be careful, don't do anything in a hurry. Don't let anyone talk you into something you do not completely understand. Read all paperwork and get advice if you don't understand something!
You have a lot on your table right now. Don't let it get to you and stress you out.
Good luck and keep breathing, it's good for you! Haha
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Sat Feb 21, 2015 11:23 pm |
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oldguy
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quote:
My concerns are the tax penalties on withdrawing the 401k, and whether it is wise to spend nearly all of the money on house and debts.
There is no 10% penalty on an inherited IRA. You can either take the lump sum and pay the taxes all in one year - or open an inherited IRA and take some money out over a few yrs, that way you will stay in a lower tax bracket. (If you take $220,000 in a single yr you'll be in a 39% tax bracket with part of the money. But if you spread it over 5 or 6 yrs you might stay within the 15% bracket.)
I like your plan of keeping the duplex as rentals (the extra $14,400 rental income will probably offset that lost survivor benefits).
Move into the house - I would keep the $90,000 mortgage - and pay off only the HEL and the Credit Card loans.
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Sat Feb 21, 2015 11:54 pm |
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Orphan15
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Location: Massachusetts
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Hi GardenCat and OldGuy,
Thanks so much for your excellent advice! It's great to hear from people who actually understand all this  .
Well, I learned another financial lesson yesterday - never estimate the amount of debt! I thought I knew my Mom's money situation, but it was way worse than I thought. Basically, the mortgage, home equity line and credit card, she owed a total of $222,000 😩. That is about 20,000 more than the house is worth. So I guess paying off the house and living there is out of the question. Now my priority is to hold onto the 401k - which is $40,000 less than I thought, a total of $190,000. But still that is a substantial amount of money. I'm named beneficiary of the account so it's my understanding that creditors cannot take it to pay off debt. I hope there are no loopholes!
I have talked to a lawyer but he is only dealing with the actual filing of probate. In order to get advice on how to invest, I need ANOTHER lawyer. I think I will roll the 401k over into another IRA account, taking only enough money out to do home repairs to the duplex and pay my son's last year of college- he gets financial aid so I only need to pay about 14,000.Then I'm going to get our side of the duplex in good shape to rent, and start hunting for an inexpensive house to buy. My husband and I really want to move into a larger house with a garage, and that 401k is probably our only hope to do so.
My worries about that plan are :
Can I access the 401k to buy a home in the future?
Will having the asset of the 401k - IRA affect my son's financial aid?
Will I lose my health insurance, which has an asset limit of 2000 per person?
We have always been in the low income bracket, which has entitled us to certain benefits like a modified mortgage, financial aid for my sons college, and free health insurance. We will still make the same small amount of money as before, but we will have that money in the 401K.
I certainly don't expect anyone to have answers to all my questions! I guess I'm just throwing this new info out there in case youall have any advice. Thanks again!!!
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Mon Feb 23, 2015 2:47 pm |
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oldguy
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quote:
I'm named beneficiary of the account so it's my understanding that creditors cannot take it to pay off debt.
In a bankruptcy, the court will not take your 401k/IRA. And it's also true that you are not responsible to pay the "remaining" debts of the deceased. But that's only true after the estate has been emptied - in your case, the estate has plenty of money to pay it's debts - ie, the $20,000 real estate shortfall and the $30,000 in cc loans.
But it may make sense to keep the house (if you like it and want to live there). The $220k loans will cost about $1300/m - your rental icome from the second side of the duplex will pay most of it - so your monthly costs won't change much. And the $20k shortfall won't be an issue, you'll till need to sell enough of the $190,000 to pay off the $30,000 in cc loans (about $40,000 before taxes).
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Mon Feb 23, 2015 3:17 pm |
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GardenCat
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Hi again,
It seems you still need some answers from different people.
A financial aid counselor at your sons college can give you the answers to the financial aid questions. Is next year or this year his last year of college? If he loses his aid, he may just have to work to help pay his way, if he isn't already. Does he still live with you and is he paying his way for that? Just questions that pertain to your entire financial picture.
If your inherited house will meet your needs it may be best to work out how to keep that house and use the duplex for income. If your husband is handy and capable (he does have his own painting business) you both could do the repairs to the duplex and save a bundle in contractor costs.
It doesn't sound to me like you are considering bankruptcy. A bankruptcy can in some cases force the sale of a house to pay debts.
I don't know your personal situation, nor that of your husband (his health, etc.) and I am not being judgmental (I hope) but I do know many people in my area with their own house painting businesses that make good incomes - over $50-60K/year. Maybe it is time to step up promoting his business? You could do the bookkeeping and job booking.
I am just throwing some ideas out there as it seems likely you will lose some of your current benefits. The greater income may provide more benefits than you may lose.
Please keep in touch with your questions and concerns. You do have a lot on your plate and a lot to figure out. As I said before, pay attention to the details and don't sign anything you unless you completely understand it the it's implications going forward.
Good Luck!!
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Tue Feb 24, 2015 10:00 pm |
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