Relative was told by her son that gifting her 401(k) to him will mitigate taxes. We suspect this advice is wrong. Are there any situations where gifting a 401(k) is beneficial?
Edit: I’m going to advise my aunt to talk to a professional. As many people said, this is a bit too prickly to handle any other way.
My aunt recently asked me to look into a financial strategy that her son stated would help mitigate taxes on her 401(k). She is gearing up to retire in the next year or so and wants to ensure she is mitigating her tax liability properly. Her son claimed that a financial adviser told him that she could gift out of her 401(k) to spouses or children up to a certain value either without a taxable event or at a lower tax rate. My aunt asked me to investigate as I have a BBA (accounting) and she thinks this doesn’t pass the smell test, but I am not a tax professional and could use some guidance.
I suspect this is bad advice and told my aunt that this seems incorrect already, but I would dig into it further. The only thing I ever found regarding gifting is that you don’t need to report a single gift transaction to the IRS unless it’s over $15K or something to that effect, but would still count towards your lifetime gift allowance (which shouldn’t matter in this scenario). Taxes would still incurred when the money is taken, whether she gifted the 401(k) and the son then takes the money or she withdraws the money herself. Unless there are some financial gymnastics that I am unaware of, I cannot find anything close resembling the scenario presented to my aunt.
The above also doesn’t address my other concern regarding gifting to my cousin. Any transfer of control is sketchy in my book and could really hurt my aunt. I don’t think this was presented to my aunt maliciously, but does reek of poor and/or unethical financial advice.
My plan is to report what my research has shown so far, anything I learn from this post that I may be missing, and have my aunt speak to a tax professional.
TL;DR: My aunt was given a suspect tax strategy and I’m saying the taxman always gets his cut. Am I missing anything?