I recently had a client call my office whose mother passed away. His mother was a great saver. She amassed a great deal in her employer’s retirement account. My client did not know what to do. He was told by her 401(k) 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!!!”
(Related: The Love Letter Strategy)
The truth is, he would pay 20% today. What the 401(k) administrator did not consider was my client’s personal issues or lifestyle. The administrator failed to inform my client that the amount of money received would put him into a 39.6% federal income tax bracket. He would pay California tax of 11.3% and Medicare supplement tax of 3.8%.
Here’s the math:
39.6% federal tax + 11.3% California tax + 3.8% Medicare tax = 54.7% in taxes
This means that, 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, I asked my client, why the government should get more of the money than his mother’s family.
He said, “I don’t know.”
I asked, “Do you want to give them half?”
His response was, “Hell no!!!!”