401k Inherited money...

[gwraigty]

This is tastier:

 

[HarveyS]

My kids inherited an IRA this year. They each had to open an Inherited IRA at the same institution as the original. Then the assets were transferred. This year they need to take an RMD based on the deceased RMD amount (about 10%). This is taxable to them at their rate. Next year and thereafter they take RMD's based on their life expectancy (significantly less). Talk to the estate dept. at the institution that holds the IRA/401k. Those folks do this all day long and can advise you. Be sure to get it right as penalties for incorrect RMDs are huge.

 

[RenoJay]

Please talk to a good accountant ASAP. My understanding is that if you change the titling of the account (I.e. doing a rollover) that you’ll sacrifice the very valuable “stretch” provision. This is worth blowing $500 for an hour of a good, knowledgeable accountant’s time.

 

[cathy63]

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.

If the 401K is liquidated*, then that is income to the estate. The estate will receive a 1099-R from the plan administrator and the estate will have to file its tax return on form 1041. If FIL had already taken a distribution from this account this year prior to his death, then there should be two 1099-Rs, one for FIL's final 1040 and one for the estate return.

One option is that the estate could pay the income tax on this money via form 1041 and then disburse it to your DW tax free. That's generally not done because the tax rate in the estate would be higher than for individuals.

The second option is that the estate can distribute all its income to the beneficiaries and report that as a deduction on its 1041 and as a distribution to you on a K-1. I believe it would have to go in box 5 of the K-1 as "other portfolio and non-business income". Then you will need to report that amount on your return on Schedule E part III, Income or Loss from Estates and Trusts. That number gets carried over to your 1040 Schedule 1 as Additional Income, and finally ends up on 1040 Line 6. So the bottom line is it would be taxed as ordinary income on your return, and it'll be the same as if you earned an extra $30K this year.

I think that's correct, but I didn't actually look at form 1041 to see if there's some special handling required for 1099-R income.

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* Before SIL liquidates this 401K, I hope someone is reading the plan docs to find out what's supposed to happen in the event that there's no named beneficiary. The plan may specify that the default beneficiary is the spouse with children as contingent beneficiaries, in which case your DW could roll the money into an Inherited IRA. That would be better than liquidating the account now, even if it's only worth $30K per child. At the very least it would make the estate's and everybody else's 2019 tax returns easier.

 

[derick]

You should speak to an expert to give you a detailed explanation of the options you've got. These things gets complicated and messy fast.

 

[Big_Hitter]

The second option is that the estate can distribute all its income to the beneficiaries and report that as a deduction on its 1041 and as a distribution to you on a K-1. I believe it would have to go in box 5 of the K-1 as "other portfolio and non-business income". Then you will need to report that amount on your return on Schedule E part III, Income or Loss from Estates and Trusts. That number gets carried over to your 1040 Schedule 1 as Additional Income, and finally ends up on 1040 Line 6. So the bottom line is it would be taxed as ordinary income on your return, and it'll be the same as if you earned an extra $30K this year.

that's how it was handled in our situation