401k Inherited money...

[rocks911]

I have been retired for a year and a half and Im loving every minute of it. 35 years as a firefighter/medic was enough for me!

My father-in-law just passed and left my wife a portion of his 401. I believe we will owe the tax on that but wonder what the rate is.

My wife wanted to roll it into one of our existing 410's/457's but that seems like a bad idea as all those accounts are pre-tax dollars. So maybe a seperate ROTH? Or just purchase a modest RV and hit the road?!

My wife and I have never inherited money so I have no clue.

Any thoughts?

[Big_Hitter]

depends - is she a named beneficiary in the k plan or is this a distribution from you FILs estate?

[RunningBum]

I don't know the answer, but I'd think it would be treated like an inherited IRA. You shouldn't have to pay taxes on all of it now, but instead take MRDs and spread the taxes over time.

[audreyh1]

I don’t think you can rollover an inherited 401K to an existing IRA as it has to be kept separate, unless inherited from a spouse.

You don’t owe tax until funds are withdrawn, but there are strict rules about when and how much must be withdrawn.

[OldShooter]

As you recognize, these are important questions. Rather than poll some guys on the internet (SGOTI) you should spend the money for an hour or so with a CPA who can give you reliable advice. Prior to that, don't do anything. The wrong moves could leave you with a large tax bill.

For example, I have a Roth inherited from my mother. It must be held as a separate account and not commingled with other funds and I am required to take a minimum distribution every year. The point here is that the rules are complicated, not that your your inherited 401K will be treated similarly.

[Big_Hitter]

Quote:

Originally Posted by OldShooter As you recognize, these are important questions. Rather than poll some guys on the internet (SGOTI) you should spend the money for an hour or so with a CPA who can give you reliable advice. Prior to that, don't do anything. The wrong moves could leave you with a large tax bill. For example, I have a Roth inherited from my mother. It must be held as a separate account and not commingled with other funds and I am required to take a minimum distribution every year. The point here is that the rules are complicated, not that your your inherited 401K will be treated similarly.

+1

[Finance Dave]

Quote:

Originally Posted by OldShooter As you recognize, these are important questions. Rather than poll some guys on the internet (SGOTI) you should spend the money for an hour or so with a CPA who can give you reliable advice. Prior to that, don't do anything. The wrong moves could leave you with a large tax bill. For example, I have a Roth inherited from my mother. It must be held as a separate account and not commingled with other funds and I am required to take a minimum distribution every year. The point here is that the rules are complicated, not that your your inherited 401K will be treated similarly.

+1

I had a MIL that cashed in a bunch of savings bonds after her husband died without telling anyone. They were poor all their lives...income never exceeded $28,000. She cashed in their life savings of $120,000 in EE savings bonds and the tax bill almost gave her a heart attack....she was crying when she understood what she had done.

[PatrickA5]

Quote:

Originally Posted by OldShooter As you recognize, these are important questions. Rather than poll some guys on the internet (SGOTI) you should spend the money for an hour or so with a CPA who can give you reliable advice. Prior to that, don't do anything. The wrong moves could leave you with a large tax bill. For example, I have a Roth inherited from my mother. It must be held as a separate account and not commingled with other funds and I am required to take a minimum distribution every year. The point here is that the rules are complicated, not that your your inherited 401K will be treated similarly.

+1 It will probably be taxable as you draw it out, but it's possible that some of it isn't if it's in a designated Roth account, or some of it was contributed with "after tax" dollars. It all depends. Get some help BEFORE you start taking withdrawals.

[rocks911]

Quote:

Originally Posted by Finance Dave +1 I had a MIL that cashed in a bunch of savings bonds after her husband died without telling anyone. They were poor all their lives...income never exceeded $28,000. She cashed in their life savings of $120,000 in EE savings bonds and the tax bill almost gave her a heart attack....she was crying when she understood what she had done.

Oh man thats terrible.

[rocks911]

Unfortunately my sister-in-law is the executor and I dont know what advice shes getting on her end (believe it or not we dont exactly get along) but as I understand it she is liquidating my FIL's 401 and we are shortly to receive a $30,000 check. New territory for me.

[Big_Hitter]

Quote:

Originally Posted by rocks911 Unfortunately my sister-in-law is the executor and I dont know what advice shes getting on her end (believe it or not we dont exactly get along) but as I understand it she is liquidating my FIL's 401 and we are shortly to receive a $30,000 check. New territory for me.

probably all taxable as regular income, unfortunately, unless you are a named beneficiary - however, check with a tax advisor

my FIL left his 401k to his "estate" which basically undid any tax advantage in the k plan

[OldShooter]

Quote:

Originally Posted by rocks911 Unfortunately my sister-in-law is the executor and I dont know what advice shes getting on her end (believe it or not we dont exactly get along) but as I understand it she is liquidating my FIL's 401 and we are shortly to receive a $30,000 check. New territory for me.

Getting advice may still be important. Don't deposit that check until you have gotten professional advice. @BigHitter is probably right, but there is a long shot that you could roll the $30K over into a tax-sheltered account. If you can do it, try to convince SIL to get good tax advice before making any moves. It's important for her, too.

[Bamaman]

If your father in law was making RMD's every year, I believe you can rollover the inheritance $ into a Rollover IRA, but you'll have to continue withdraws based on his age yearly. Then you'll have to count the withdrawals in with your income to pay regular income taxes.

Do not allow the executor to cut you a check (or cash it) unless you need the $ and are prepared to pay the income taxes on the $. Often this kicks people into higher tax brackets.

For example, I will begin RMD's in 2020 equal to about 3.7% of the 12/31/2019 balances on my IRA totals. If I died and my daughter was a beneficiary, she wouldn't have the option to sit on the $. She'd have to pick up where I left off--even if she didn't need the $.

[Big_Hitter]

Quote:

Originally Posted by Bamaman If your father in law was making RMD's every year, I believe you can rollover the inheritance $ into a Rollover IRA, but you'll have to continue withdraws based on his age yearly. Then you'll have to count the withdrawals in with your income to pay regular income taxes. Do not allow the executor to cut you a check (or cash it) unless you need the $ and are prepared to pay the income taxes on the $. Often this kicks people into higher tax brackets. For example, I will begin RMD's in 2020 equal to about 3.7% of the 12/31/2019 balances on my IRA totals. If I died and my daughter was a beneficiary, she wouldn't have the option to sit on the $. She'd have to pick up where I left off--even if she didn't need the $.

my FIL was taking RMDs before he passed - the plan administrator had no recourse but to issue a check equal to the outstanding balance to the estate, based on his beneficiary election

had he named DW and SIL as direct beneficiaries, DW could have retained some of the preferential tax treatment as you mention

but I agree - don't cash any checks until competent tax advice has been obtained

[HI Bill]

As others have said, do not accept a check. Ask for your financial institution to perform a DIRECT ROLLOVER from the 401(k) to an inherited IRA. Then, nothing is taxable now, but when you take annual RMDs (assuming the FIL is older than 70), they'll be taxed as ordinary income.

If you cash/deposit a check now, you'll have to pay taxes on the entire amount, as ordinary income....

[Big_Hitter]

Quote:

Originally Posted by HNL Bill As others have said, do not accept a check. Ask for your financial institution to perform a DIRECT ROLLOVER from the 401(k) to an inherited IRA. Then, nothing is taxable now, but when you take annual RMDs (assuming the FIL is older than 70), they'll be taxed as ordinary income. If you cash/deposit a check now, you'll have to pay taxes on the entire amount, as ordinary income....

isn't the plan administrator the one that performs the direct rollover? I've only taken rollover distributions twice from k plans and both times those were checks made out to my new k plan.

[gwraigty]

Quote:

Originally Posted by Bamaman Do not allow the executor to cut you a check (or cash it) unless you need the $ and are prepared to pay the income taxes on the $. Often this kicks people into higher tax brackets.

From a couple of posts above, it sounds like that ship has already sailed. This is another good reason for beneficiaries to be named, so they can make the decisions for themselves out of the plan options available, not the executor, who won't necessarily know enough of the heirs financial/tax situations to make the right call.

https://www.fidelity.com/viewpoints/...heritance-tips

Quote:

Nonspouse heirs can also either leave a Roth or traditional 401(k) plan with the plan provider (if the plan allows) or directly roll it into an inherited IRA. If the original account owner was under age 70½, the RMDs will be based on the inheritor's age—this is the "stretch out". (Important note: Not all plans allow a beneficiary to stretch out RMDs. Some may require the money be removed from the plan in a lump sum or within 5 years. Check with your plan provider.) If the nonspouse beneficiary directly rolls over inherited 401(k) assets to an inherited IRA, they can generally calculate the RMD based on their life expectancy.

The OP is a bit confusing, but I'm reading into it that these inherited funds are Roth or after-tax, which should have no immediate tax consequences. That's fortunate, because according to this link:

https://retirementlc.com/non-spouse-...ary-rollovers/

by the executor automatically cutting a check, she has effectively ruined the DW's ability to do an indirect rollover to an inherited Roth IRA, where the funds could have continued to grow tax-free outside of the RMD requirements.

[HI Bill]

Quote:

Originally Posted by Big_Hitter isn't the plan administrator the one that performs the direct rollover? I've only taken rollover distributions twice from k plans and both times those were checks made out to my new k plan.

If the beneficiary is designated for the account, then the current fund administrator will execute the transfer after the beneficiary shows proof of death. I believe for one institution, I had to show a funeral notice in the paper, along with a copy of the death certificate.

To transfer to VG, I had to transfer the account to my name with the owner's brokerage house first (as an inherited IRA), then ask VG to execute moving the $ to VG.

[gwraigty]

Quote:

Originally Posted by HNL Bill If the beneficiary is designated for the account, then the current fund administrator will execute the transfer after the beneficiary shows proof of death. I believe for one institution, I had to show a funeral notice in the paper, along with a copy of the death certificate. To transfer to VG, I had to transfer the account to my name with the owner's brokerage house first (as an inherited IRA), then ask VG to execute moving the $ to VG.

I had a slightly different experience when inheriting my father's TSP. The only proof of death required was a death certificate. (I wouldn't have been able to provide a funeral notice. IMO, that's a ridiculous requirement, as not everyone follows a standard funeral procedure. A death certificate is enough legal proof.) Then I had to open an inherited IRA at my brokerage to receive the funds.

[rocks911]

Quote:

Originally Posted by Big_Hitter probably all taxable as regular income, unfortunately, unless you are a named beneficiary - however, check with a tax advisor my FIL left his 401k to his "estate" which basically undid any tax advantage in the k plan

I think thats what my FIL did. I remember telling him that he'd have to withdraw it over time prior to his passing. He said he understood but that he'd let us deal with it. I didnt argue but I did feel like Uncle Sugar would end up with more.