Inherited 401k – most tax efficient way to distribute
My sibling and his family passed away last year, leaving no surviving beneficiaries. He has a 401k with his employer that needs to be distributed between the next of kin in both sets of families (his family and his spouse’s family)
What is the most tax efficient way to do this? Is it
1. Cash it out (if we do this, is the total amount of the 401k taxed at the estate income tax rate?) and distribute?
2. Should we open inherited IRAs for each of the recipients of the money and ask the plan to do separate rollovers into each of these -is this even possible?
3. Is there some other way to do this?
Thanks for your help.
Permalink Submitted by Alan - IRA critic on Sat, 2014-11-08 21:08
Leaving a 401k to an estate results in loss of efficient tax options for estate beneficiaries. This article contrasts options for an IRA vs a qualified plan estate beneficiary, and you can ignore the IRA portion of the article. Almost surely, the only option is a lump sum distribution directly to the estate, and since the estate will have higher tax rates than the beneficiaries, the executor will probably pass through the lump sum distributions from the estate to the individuals on Form K1. At least that will result in each individual reporting the income on their own 1040 and paying taxes at their individual tax rate. The executor can always ask the plan if Option 2 is possible, but it rarely is.http://www.morningstar.com/advisor/t/93123895/estate-as-beneficiary-ira-vs-qualified-plan.htm?