Estate inherits 401k, trustee withholds 20%?

Submitted by J C McEw on Wed, 2024-01-10 03:02

I am the sole beneficiary of an estate. The estate inherited a 401K by default because no beneficiary was named. The 401k was liquidated and will be passing through the estate to me by K-1 in order to use my personal tax rate. Fidelity was the 401k trustee and withheld 20% for federal taxes (no state tax was withheld). I was informed that the estate’s 1099 withholding CANNOT pass on to the beneficiary. Is this true? Can this be remedied? What exactly does this mean and how best should both the estate and myself proceed? Your help would be greatly appreciated!



Submitted by Alan - IRA critic on Wed, 2024-01-10 03:51

  • The estate CPA is correct. The estate will have to file Form 1041 for a refund which will be sent to the estate and the executor can then pass it through to you tax free. But that still leaves you with an underpayment penalty with your 1040 unless you anticipated this and paid timely estimates.  Not  naming a beneficiary on a qualified plan will almost always result in a dreaded lump sum distribution to the estate.

Submitted by J C McEw on Wed, 2024-01-10 04:10

Thank you for your timely insight- very much appreciated!

Submitted by J C McEw on Wed, 2024-01-10 04:53

When Fidelity withheld the 20% on the 401k prior to disbursing to the estate, was this optional?  Wandering if the executor had a choice.  It occurred 7 days ago.  Thank you in advance.

Submitted by David Mertz on Wed, 2024-01-10 12:22

Absent a request by the personal representative of the estate to have 20% withheld, it seems that this distribution was improperly processed.  A distribution from a 401(k) to an estate is not eligible for rollover, so the statutory requirement to withhold 20% for federal taxes on rollover-eligible distributions from a 401(k) does not apply.  Fidelity’s own one-time withdrawal form indicates that if 20% mandatory withholding does not apply, the statutory default of 10% withholding applies unless an election to have no federal tax withheld or more than 10% withheld is made.

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