Steps to distribute funds from an estate 401k to beneficiary
My sister passed away last year. I am the sole executor and sole beneficiary for her estate. She had an employer 401k account, but did not designate a beneficiary (big mistake!). Last year I had her account transferred to an “estate of…” 401k. We have finished probate for her will, and I would like to transfer the account to myself. I understand it has to be a lump sum distribution. Can the funds be distributed directly to my checking account? Or should I have the funds distributed first to a brokerage or bank account in the name of the estate, and then to my personal account? And if so, at which stage should I have taxes withheld? Any help would be greatly appreciated.
Permalink Submitted by Alan - IRA critic on Thu, 2022-07-28 20:40
You are correct, leaving it to her estate was a big mistake. Since the account had no designated beneficiary, the balance is not eligible to be directly rolled to an inherited IRA. Further, most 401k plans will not offer partial distributions over the IRA RMD period, and will instead issue a lump sum check payable to the estate. I doubt that they will accept an assignment letter from you as executor to assign the inherited 401k to you as estate beneficiary, but you can try. If they will do it, then they can issue their check to you personally. Otherwise, if they will not accept assignment, the check will go to the estate, and you will have to pass it through the estate to you on Form K1 and an estate income tax return Form 1041. Further, if federal withholding is taken from a distribution to the estate, the withholding credit cannot be passed through to the beneficiary. The estate must file a 1041 to claim withholding credit, receive the refund from the IRS, and distribute it to the beneficiary. Again, you might ask the plan as executor if they would accept an assignment request to avoid running the check through the estate, but the chance of the plan agreeing to that are very slim. That would leave you as beneficiary underwithheld but perhaps you meet a safe harbor based on 2021 taxes.
Permalink Submitted by Jonathan Friedman on Thu, 2022-07-28 20:48
Thanks for the information – extremely helpful. I think the plan representative said they could waive the withholding to an estate account, so that might simplify things a bit.