income taxes on inherited 401k
My 57 year old brother passed away in September. His 401k was put into an estate account and will be distributed to myself and my 3 sisters. The estate has already witheld the flat 20% tax.
Will we have to pay full income tax on our portions of the remaining balance or do we get credit for the tax already paid?
Permalink Submitted by Alan Spross on Thu, 2007-12-27 18:10
First, it should be noted that the direct inherited IRA transfer does not apply to estate beneficiaries, so that was never a possibility here.
I don’t know why 20% was withheld here because the distribution was not an ERD (eligible rollover distribution). The withholding was evidently applied to the estate’s TIN, and will have to be recaptured by the estate when a 1041 is filed. The estate should then credit this withholding to each beneficiary. It’s now too late to determine if the estate could have used the 5 year rule for distributions or not, as spreading out the income over the period could have reduced the marginal rates for each beneficiary. Employer plans typically want to pay out the death benefits and get them off the books in a case like this.
In any event, you will have to front the income tax on your respective returns, but get the credit for the 20% (that should not have been withheld) from the estate pursuant to the estate 1041 filing.