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Inherited 401k (to estate)

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  • Inherited 401k (to estate)

    Unfortunately, a family member passed away recently and I am the executor of the estate. There was no will and no designated beneficiary on the 401k plan left behind. The only option was a lump sum payout (no stretch option). The payout has been received (minus 20% for federal withholding) and deposited into an estate account. I've consulted with my accountant and an estate attorney and the consensus is to have the estate pay fully taxes on it, and then disperse the money as seen fit later (only me and my mother would receive this money). We then don't have to pay taxes on what is ultimately received. Is there any better option to decrease overall taxes paid? Our accountant says we have to pay 35% federal, plus our state taxes. I'm in Georgia, so state taxes are 6%. I'm in the highest marginal tax bracket. My mother doesn't file taxes as her only income is social security.

    Many thanks for any advice. I understand this is pre-tax money and needs to be taxed, just wish it wasn't getting hit quite so hard (41% total it looks like).


  • #2
    May be too late, now; but did you check the plan document to see if they had default beneficiary arrangements for accounts with no named beneficiary?


    • #3

      The only option was a lump sum payout (no stretch option). The payout has been received (minus 20% for federal withholding) and deposited into an estate account.
      Click to expand...

      This was not true. Unfortunately, it is also too late for the other useful option. If the estate is the beneficiary, you are correct that there is no ability for non-spouse beneficiaries to use lifetime distributions.

      However under IRS regulations, the executor could have done a direct rollover of each beneficiary's share of the IRA to Inherited IRAs and the beneficiary's could have used the "five-year rule" for distributions. If the Inherited IRA custodian would not allow this, there are other custodians who will.


      • #4
        I appreciate the responses. Vanguard was the custodian of the 401k plan and the company is large enough that Vanguard has a dedicated team handling this company's 401k accounts. I spoke with multiple people at Vanguard and there was no option for rollover to an IRA.  I had to take a 1-time lump sum payment, at some point in the next 5 years, and it had to go to the estate. I do not want the estate opened for 5 years and want to close it as soon as I can. I was told by more than one person within Vanguards specialized department that handles this type of thing that the lump sum payout was the ONLY option. There was no named beneficiary in this case, so by default, it went to the estate. I also consulted with my estate attorney and accountant and they said this situation is typical. Either way, I'm not asking if I should have done something different in retrospect. I did my due diligence and spoke with all the right people. As people that have gone through this type of thing know, there is a lot to do, in addition to grieving, and I can't consult 5 different professionals on everything, post in every forum, and second guess every decision. I'm looking for advice moving forward. If there is any advice for what to do differently moving forward, I'd appreciate it. If not, that's ok too. I'm fine paying the taxes if that's the only option. I'm not counting on this money for anything and wish the circumstance that led to me getting it never occurred.


        • #5
          When you take a lump-sum payout from a 401k, you have to pay taxes, there is nothing more to be done in this situation. Unfortunately, Vanguard did not provide correct advice or it was somehow lost in translation, not unusual. Not sure how large the payout was, but it appears that you could have saved taxes on your mother's allocation had you known to take @spiritrider 's advice.

          Totally agree that the job of executor is about 10 times the work that anyone expects. My condolences on your loss.
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


          • #6

            Is there any better option to decrease overall taxes paid?
            Click to expand...

            no i dont think so.


            • #7
              i wonder why they don't mandate beneficiaries to be designated on these kind of accounts?

              sorry for your loss.  it's a lot of work at a difficult time unfortunately.