Deciding whether to leave your children a 401(k) or cash isn’t just a money question — it’s a math problem wrapped in a tax headache, tied with an inflection of “What will the IRS do next?” Bridget, a listener of The Women & Money Podcast with Suze Orman, did well with her question in September, asking, “Is it better to leave a 401(k) to children or to cash?”
Bridget admitted that her children would probably choose cash without hesitation. Still, she recognized the complexities of inheritance rules and wondered whether she and her husband should live off their money or spend their 401(k) in retirement. Oh, and she proudly shared that all of her daughters opened Roth IRAs early — her youngest even started at age 18.
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Suze’s reaction? Classic tough love brilliance: “Why don’t you have a Roth 401(k)? Why don’t you convert? Why don’t you do stuff like that? So that when they inherit, it’s not that big of a deal.” She hasn’t muddied her advice for a second. “You have to listen to me and listen to me well.”
Suze challenged Bridget’s focus on her children’s financial well-being, saying, “Why don’t you care about you and your husband and what you’re going to do when you get older and what’s best for you?” Stop worrying about the kids and mama bear and start worrying about yourself. Typical mother, right?” It was a call to action, urging Bridget to prioritize her own financial security over planning her children’s inheritance.
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Her advice focused on using Roth accounts more intelligently. “Roth 401(k). Start with that. Grow it, let it grow, let it grow,” Suze urged, adding that the choice between spending money or drawing from a 401(k) depends heavily on tax brackets and financial circumstances. during retirement. In essence, it’s not about leaving more money – it’s about structuring it in a way that benefits everyone, starting with you.
While Suze’s advice is valid — converting to a Roth 401(k) can protect your children from high tax bills on inherited 401(k)s — it’s worth asking a few additional questions. First things first: how secure is your financial plan? If you and your husband spend your cash reserves to maintain a 401(k), will that leave you vulnerable to unexpected expenses? And what if future tax laws change (because let’s face it, they always do)? That Roth 401(k) strategy may not feel like a silver bullet if the rules change again.
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It is also worth considering the psychological impact on your children. Cash, while easier, does not necessarily teach financial responsibility. A 401(k), on the other hand, requires your heirs to engage in long-term planning and possibly manage distributions wisely. Does this provide an opportunity to involve your children in estate planning discussions, providing them with funds and the financial knowledge they need to succeed?
Not everyone will agree with Orman’s advice to put your retirement ahead of your children’s needs – it may feel counter-intuitive or even selfish to some. But there is a case to be made. After all, securing your own financial stability means you’re less likely to become a burden to them later on.
That said, if you’re in a position where you have your retirement on track, it’s worth thinking about how you want to support your children, beyond leaving money behind. Maybe it’s about teaching them financial skills, teaching them how to manage what they have, or modeling a thoughtful approach to money. It’s not just about what you leave behind – it’s about the mindset and habits they bring with them.
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This article “Is It Better to Leave Kids in a 401(k) or Cash?” – Suze Orman Suggests Third Option, But Adds: ‘Stop Worrying About the Kids’ originally appeared on Benzinga.com
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