What is wrong with this plan

[Sidewinder]

My uncle's will set up a trust from which I, Sidewinder, am to receive a monthly disbursement. The amount of the disbursement is greater than my current gross monthly pay but I have no idea how many months these will go on for (until either I die or 40% of the estate has been distributed.  I have no idea how many dollars that 40% is).

 

The plan I have concocted is to maximize my 401k contribution - I currently contribute 6% of my salary as that is the company match ceiling - to the full 25% that the company allows; and that reimburse myself for that extra 19% out of the trust income.

 

My reasoning goes that since the income you contribute to your 401k is untaxed, I significantly ease my tax burden with no impact to my net income.

 

I suspect I'm probably missing something here though.  My personal history tells me this probably isn't as good of an idea as I think it is.

 

(What is it that I am missing?  : / )

 

[8ball]

I'm not sure what the tax implications are for the trust income but more is better than less in the 401K. Figuring out how to get some into a Roth would be ideal.

[Glacier]

While the company allows you to contribute 25% per pay period, there are limits as to how much in total for the year you can contribute.

 

[Sidewinder]

On 5/7/2024 at 12:08 PM, Glacier said:

While the company allows you to contribute 25% per pay period, there are limits as to how much in total for the year you can contribute.

 

 

También, I've begun to wonder — not having had a look at exactly what is in the trust — if replacing the increased 401k deferrals in my day-to-day income would necessitate cashing out any securities in such a way as to realize a taxable capital gain.

 

Which obviously means I have to research whether the tax savings from the salary deferral are greater than the capital gains tax incurred, and also weigh whether the holdings in the trust (which I do not manage) are liable to grow betterly than those in the 'k (which I do manage).

 

Why is there work like this that I have to do?  I remember when money management entailed counting the coins in my pickle jar and mailing in cereal box tops.

 

[Glacier]

If you are getting a monthly distribution, if you ask for the distribute to be in Cash, then any tax consequences of the sale (in order to pay you cash), would remain with the Trust.  It's only if you take the distribution "in kind" which means you take the actual securities, then there may or may not be taxes due when you sell what was given to you in the trust.  

My father's trust was not set up for monthly distributions for the three beneficiaries, so as the trustee now, I have done 2 distributions.  The other beneficiaries and I took them "in kind" as the value of the assets was lower than the original purchase price, and thus, we can sell and take the loss to offset any of our own other investment gains. 

 

Not sure how communicative you are with the trustee, but you can always ask what the assets you would receive monthly are going to be.  If in cash, then your plan may just work.