What Are the 401k Rules for Inheritance?


Quick Answer

There is a tax-deferral option for non-spousal beneficiaries of 401(k) plans, reports MarketWatch. A trustee-to-trustee transfer from the 401(k) plan to an IRA incurs no income taxes for the beneficiary, but the required minimum withdrawal rates reflect the age of the original owner of the 401(k) plan.

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Full Answer

A trustee-to-trustee transfer occurs when the 401(k) distribution does not pass through the beneficiary. Funds from the 401(k) go directly to the custodian of the IRA, states MarketWatch. The IRA contains only funds from the 401(k). The IRA withdrawal amount is based on the IRA balance and the applicable single life expectancy divisor of the beneficiary as calculated by the IRS.

If a beneficiary does not comply with withdrawal rules mandated by the IRS, there is a substantial tax penalty. Beneficiaries owe 50 percent of the difference between what should have been taken out and the actual withdrawal amount, if any, according to MarketWatch. Annual required withdrawals are required by Dec. 31 of the year after the year the deceased bequeaths the 401(k).

Cashing out the 401(k) is another option, but the rollover provides distributions over the beneficiary's lifetime, states Bankrate. This option keeps funds growing at a lower tax rate, but inherited accounts are not protected from creditors or lawsuits. Regarding community property, some states consider inherited assets as separate property of the beneficiary.

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