401k with no beneficiary designated
Mom inherited dad’s 401k when he passed away a few years ago. Now, mom has passed away and I am executor for her estate. She left a will that divides her estate equally to my sisters & I.
Mom failed to re-submit a new beneficiary designation form when she inherited the 401k. Consequently, the custodian (Fidelity) has indicated that since there is no current beneficiary form on file, the account beneficiary will be the estate. They advise that the account balance is immediately payable (lump sum) and is not eligible for rollover.
They sent me an IRS form W4-P (Withholding Certificate) to complete and said that they will determine the tax withholding of the distribution and move the account out of mom’s name into an estate account as soon as I return the form and my executor assignment docs from the probate court.
Within 30 days the funds in the estate account must be fully distributed to an estate bank account or by check, payable to the estate. At the time of distribution the tax withholding will occur.
My question is, after they withhold taxes are we, the estate beneficiaries, going to be taxed again when I do the distributions from the estate account each of us individually?
Permalink Submitted by Alan - IRA critic on Mon, 2013-04-29 19:21
Sorry to hear of your loss. It’s unfortuneate that your mother did not roll the inherited 401k to her own IRA and named each child as 1/3 beneficiary. You could then have stretched RMDs over your life expectancies. The plan does not have to offer direct rollovers to successor beneficiaries through an estate. But there will be no double taxation. Withholding can be declined and is not mandatory in this situation because the total distribution is NOT an eligible rollover distribution. As executor you can pass the income through to each beneficiary individually and the beneficiaries can pay the taxes through quarterly estimates. Alternatively, you can elect withholding for the estate and then pass that credit to the beneficiaries. Not sure which option will work best for you in this situation, probably the first one if you are sure the estate can be closed this year. Check with the accountant who will be preparing the 1041 for the estate.
Permalink Submitted by mk foss on Mon, 2013-04-29 21:11
Unfortunately IRS does not allow Form 1099-R withholding to be passed to beneficiaries. It can only be applied against taxes owed on Form 1041, applied to future estimates of the estate or refunded to the executor. It could hold up closing the estate if the estate bank account is closed before the refunded tax is received. You should definitely decline the withholding and have the beneficiaries make estimated tax payments or rely on the prior year’s tax to avoid estimated tax penalties.
Permalink Submitted by Dave D on Tue, 2013-04-30 09:49
Thanx for your feedback. I spoke with the Fidelity rep gain yesterday and learned that once they estatblish an estate account , I have only 30 days to give distribution instructions but, the estate can be the only recipient – so, not much to think about there. It appears that the only variable is whether or not to decline the withholding they want to take before distribution.I tried reading the instructions for IRS form 1041 and schedule K-1 to try to find something useful and determined that there is no resemblence to anything I’ve ever known about tax returns. I’ve also got a house to sell and dump those proceeds into the estate account for distribution. So, I’ve decided to bite the bullet and retain a CPA for help.You know, there must be a lot of people who end up with a 401k like this – where the original owner failed to submit a current beneficiary form – it’s remarkable that the rules and regs are so arcane.
Permalink Submitted by Alan - IRA critic on Tue, 2013-04-30 16:22
Probably a good idea to retain the CPA to file the 1041, as the rules differ from Form 1040 in many respects. You should decline the withholding, but notify the beneficiaries that they need to take steps to avoid under payment penalties since the estate will be passing all the taxable income from the plan distribution to the beneficiaries. Withholding on the distribution to the estate will not prevent this. The excess withholding would come back to you as executor but when you paid it to the beneficiaries when you close the estate, it will just be cash, not withholding that could be credited to their individual tax liability on their 1040s.