One more strategy would be to convert your 401k to a Roth 401k or Roth IRA. In the example above if you were to convert the entire $500,000 to a Roth, then you are in for a big surprise. You will owe tax on $500,000 the same year you convert. Chances are you will not be happy, but I bet Uncle Sam will be. A better option to consider may be to convert over a period of years. Let’s say 10 years. You would convert $50,000 each year over the next 10 years. The difference can be huge as far as taxes go. Would you rather pay tax on the entire $500,000 in one year or pay taxes on the smaller amount each year over a ten-year period? The big reason to consider this strategy is once you convert to a Roth, then your withdrawals are 100% tax-free. You can’t get away from paying taxes on the $500,000, but with proper planning, you can certainly lessen the tax. Note that there are different rules for leaving your qualified plan to your spouse versus your children.
Don’t be afraid to seek financial and estate planning help. Tax and legacy planning can be pretty complicated and laws tend to change regularly. Remember smart financial decisions will impact the both the quality of your life and legacy.