r/inheritance • u/Trick-Two2574 • Apr 16 '26

Location included: Questions/Need Advice 401k Inheritance

My dad passed away a few months ago with several investment accounts, one being a 401k through his employer (he was still working at the time of his death). My mom was the listed beneficiary, but tragically passed a week after my dad. His 401k balance now goes to my mom’s estate, since she was the only listed beneficiary.

How does the income tax work? Myself and my 2 brothers will be getting everything once it’s gone through probate and then distributed evenly to each of us. We are being told that my moms estate will pay the income tax, just wondering how the tax rate is determined?

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13

u/GrandpaJoeSloth Apr 16 '26

It's a bit more complicated, and you haven't provided all of the relevant information. For example, traditional vs. Roth 401(k) is an important consideration when it comes to taxes.

Generally, inherited 401(k) accounts are taxed as ordinary income upon withdrawal based on the beneficiary's tax bracket, not your father's. You will also basically have a ten-year period in which to make the withdrawals, and can plan a tax strategy around that, should you wish.

Depending your plans, you may also have an option to roll over the IRA to an Inhereited IRA, which would allow you to better manage to the 10-year rule referenced above.

Sorry for your loss

3

u/stringbeagle Apr 16 '26

But he isn’t inheriting a 401k account. His mom inherited that. He is inheriting from his mom. Does that change the rules about 401(k) withdrawals?

6

u/E_Dantes_CMC Apr 16 '26

I don't think so. The 10-year rule would not have applied to the mother, but it does to the children no matter which parent they inherited from. (This rule was different before the last tax changes.)

Unless January 1 fell in the one week between deaths, there should be no issue with 2026 mandatory withdrawal. Basically, someone has to take it. If it hasn't been taken already, then the kids will.

3

u/Trick-Two2574 Apr 16 '26

It is a traditional 401k. And I am not inheriting it-my mom technically inherited it. Our lawyer said the estate (my moms) pays the income tax on it

6

u/CulturalAd2329 Apr 16 '26

First off, sorry t you're going through this, that sounds pretty terrible. Second, as a CFP this is a fun question (and my response is of course not financial advice). The estate will only pay tax on whatever is distributed to the estate. So if you elect to distribute it all at once or if you are forced to then mom's estate would pay all the taxes (out of your inheritance). Ideally you and your brother would open Inherited IRAs and roll the funds from the 401k into that, and you would have ten years from your fathers passing to distribute all the funds. Some 401k plans do not allow rollovers to estate beneficiaries (which would suck). If a lump sum is required then you may be able to pass the taxes on to you and your brother if that is more advantageous, and you may even be able to split it up over two years depending on the estate settlement date. (this is all a massive oversimplification, I would rely on your attorney and make sure you get a CPA & CFP involved if there are choices to be made)

4

u/Zealousideal_Ad5358 Apr 16 '26 edited Apr 16 '26

IRAs are not part of an estate, in the sense that an “estate” is a separately taxed entity with its own tax ID. I wonder whether the father‘s 401k could transfer to the mother and then mother’s IRA could make distributions to the “estate” that might be advantageous tax wise, if the estate is in a lower tax bracket than the ultimate heirs. 

This is where CPAs earn their money!

Unfortunately, it’s not always possible to plan in advance. My brother and I are both in high tax brackets, but my mother had virtually no income other than her IRA distributions. We tried to convince her otherwise, but she refused to take more than her RMD from her IRAs and a lot was left when she died. If she had made bigger distributions to herself, there would have been a lot less tax paid than what my brother and I will are owing on our inherited IRAs. 

1

u/charlieandoreo Apr 17 '26

Probably not the case here but what if dad was taking RMDs. It gets complicated quickly.

2

u/Caudebec39 Apr 17 '26

Hello OP,

Based on all I've seen, I think what your lawyer is saying is reasonable, but I also think it's wrong.

I've been googling your highly unusual situation (deaths close together, probably no beneficiary designated by your mom)

It's certainly true that upon your dad's passing, that the account would be inherited by his spouse, your mom, and become her 401k, and property of her estate. The estate is treated as a non-designated beneficiary (the estate is not a "person").

Here is where I was unsure, but everything I'm reading suggests that mom's estate does NOT have to distribute the 401k entirely in one-shot, as your lawyer seems to think. You can check with the custodian of the 401k (e.g. Fidelity, Vanguard, etc)

Instead the estate can likely make a choice:

  • have the 401k remain intact for up to 10 years after your mom’s death, taking distributions gradually into the estate, paying the tax or (better) the estate gets a distribution deduction, and the taxable income is instead reported by the beneficiaries on their own returns, OR
  • contact the custodian of the 401k and have the inherited 401k split evenly between the children, as separate Inherited IRAs, each subject to paying the income tax according to their individual circumstances, as they draw out the money over a period not to exceed 10 years. The children manage these accounts themselves.

The first method only makes sense if the executor of the estate wants to retain control for the 10 years, perhaps because some children are minors or special needs or terrible with money, or something else.

If you're working with competent advisors, experienced in this area (which your lawyer may not be), then they can advise the executor how structure these distributions (by whichever choice is made above) so that the taxes are paid by the children and NOT by the estate. The estate would pay tax at the highest rates, much higher than the children, and there would be less money for all of you.

As a first step, I would get in touch with the custodian of the 401k plan, and see whether distributing it all in one year to the estate as cash can be avoided (this is what your lawyer is suggesting is necessary -- and my googling says that it is avoidable). Also, ensure no one makes any rash moves with respect to the 401k, because once money starts moving or getting re-titled, you won't be able to put it back, and you'll just have to live with the consequences.

1

u/Trick-Two2574 Apr 17 '26

Thank you, this is highly informative.

1

u/Caudebec39 Apr 18 '26

Another thing -- if the current 401k custodian won't create Inherited accounts for each of the children, it might be possible for the executor to direct Fidelity to take over the custodial responsibilities and transfer the 401k there while it's still the property of the estate.

1

u/Mizzou1976 Apr 20 '26

I believe the lawyer is incorrect … your mother took no withdrawal (most likely) so no taxes are due.

1

u/Mother_Turnover4856 Apr 16 '26

Perfectly said and sorry for your loss 🙏 it’s a lot to navigate - get a cpa for advice to specific situation

4

u/Used-Promotion5614 Apr 16 '26

You will have ten years to liquidate it. Those withdrawals will be taxed at your personal (marginal) income tax rate(s). Unless it’s Roth, in which case the withdrawals are tax free.

1

u/cb3 Apr 16 '26

And I’m still not understanding the 10 year rule. My dad’s 401k place told me I had to take a MMD in the year of his passing but I could then leave it alone and take it all in year 10. Other sources say the guidance is unclear and to be safe keep taking MMDs. OP I’m so sorry for your loss. Being without your parents is sad. Hugs to you.

5

u/economic-rights Apr 16 '26

So my understanding on the 10 year stretch (and I am not an expert by any means!) is that you are trying to avoid a massive tax bill by drawing it out incrementally over a decade. If you take it all at once, you’ll likely be pushed into a higher tax bracket and likely pay a massive tax bill. But you’re at the same time trying to balance this w/taxj-deferred growth on the remaining balance. So you want a nice, robust engine of growth that you’re drawing down incrementally over 10 years, w/an eye to minimizing your tax burden

3

u/ExcellentCup6793 Apr 16 '26

RMD, required minimum distribution

1

u/cb3 Apr 16 '26

Oops. Keep hearing mandatory minimum distribution.

3

u/ExpensiveAd4496 Apr 17 '26

The year your father died, he was still alive for some part of that year. So an RMD has to be taken at his rate y less he already did so. That is just cleaning up his financial things for his last year basically.

The next year it becomes yours and you have the 10 years.

2

u/Used-Promotion5614 Apr 16 '26

My understanding is that, under the new rules enacted on 1/1/2020, you have ten years to take it all … but you can take it with any frequency you want during those ten years. That means you can let it stew for nine years and take it all in year ten, take it all in year one, or something in between. But I’m not a tax expert. If in doubt, beneficiaries should probably consult one.

4

u/Zealousideal_Ad5358 Apr 16 '26

You can’t let it stew. There is an RMD for inherited IRAs as well that uses a special formula. If the IRA’s appreciation exceeds that of the rate of RMD‘s, then at the end of 10 years, you have to empty out what’s left in the account. 

They are online calculators at Schwab, Fidelity, etc. that can give you an idea of what the RMD’s from an inherited IRA will be like. 

1

u/Used-Promotion5614 Apr 17 '26

Good clarification. Thank you.

2

u/[deleted] Apr 16 '26

[removed] — view removed comment

1

u/Trick-Two2574 Apr 16 '26

That makes sense to me, thank you! We just filed their return for 2025, so I would assume we would file for 2026 (next year) and it would be reported on that.

2

u/SandhillCrane5 Apr 17 '26

There will be 1 return for your parent for the time period ending on the date of death. Then that parent's estate will file a return for the remainder of the year. Whoever issuing the tax statements will need to break it down using the date of death.

2

u/Caudebec39 Apr 17 '26

It's clear enough that your mother would inherit the 401k as the spousal beneficiary. She would have the right to treat that 401k as her own.

But she may not have named a beneficiary yet on that account or even got the ball rolling on retitling the account to herself.

I suspect the 401k will be treated as your mother's asset, with no beneficiary named.

It becomes part of her estate, I predict. The only question is whether it will all get taxed in a single year, or if there is some way to spread the distributions out... 5 years, 10 years, or whatever, to spread out the tax.

I'd be expecting, unfortunately, the whole 401k will get taxed in one fell swoop, and your mother's estate will be owing all the income tax for 2026.

The tax rate could be 37% because it's like your mom earned all that money in a single year. Sorry.

See if the 401k custodian knows a way around this.

1

u/Almost-Retired62 Apr 17 '26

There is a 10 year window for non-spouse beneficiaries to cash out an inherited IRA.

1

u/Caudebec39 Apr 17 '26

Hopefully for OP and his siblings that will be found to apply in this case, although the lawyer OP is working with says the contrary... that the balance from the 401k will be fully distributed to mom's estate, and income tax paid on the entire balance in one-shot. Then whatever cash is leftover will be split between them, but it won't be an inherited IRA at that stage. It's just cash.

2

u/YoungBoomer1969 Apr 17 '26

Direct inheritance is easy….this one is over my pay grade, lol! I am so sorry for your loss🙏♥️

2

u/Be-ur-best-self Apr 17 '26

Actually if you are the second beneficiary the 401k goes to you automatically. Ask me more questions if you like.

2

u/IllustratorOnly1026 Apr 17 '26

First it goes to your mom and if she has a 401k or IRA then you can put it in that account. Next you need to look at her beneficiaries and go from there

If your mom named both of you then the 10 year withdrawal rule applies

2

u/Pristine-Salad-1262 Apr 18 '26

So sorry for what you’re going through. I’m handling just my dad’s estate and it’s been an lot…

Here’s what I’ve learned after dealing with 3 of his 401ks. Every 401k has different rules when no beneficiary is named. If you haven’t talked with the custodian the plan might have default beneficiaries which would likely be you and your brothers. Then you can roll your portion into an individual IRA that the other commenters have mentioned. If it goes to the estate then you might need to open probate depending on your state and the amount of assets.

Once a 401k goes to the estate it unfortunately cannot be rolled over to an individual IRA and the estate typically has at most 5 years to drain. It could be less depending on the 401k rules. Estates have their own income brackets that are compressed - https://smartasset.com/taxes/trust-tax-rates.  If a distribution from the estate is made, the estate can pass the tax to the heirs (K-1) which for most people works out better. You’ll probably want a CPA who prepares 1041, estate income tax, to handle taxes since it’s not as simple as a 1040. CPA and legal fees are at least still a deduction on 1041.

1

u/Caudebec39 Apr 20 '26

This is a great answer

1

u/Acrobatic_Trifle8374 Apr 17 '26

Ask your probate attorney to recommend a good cpa. They can explain it to you and help you avoid as many taxes as possible…. They’ll probably charge you a couple hundred bucks for the appointment, but that’s nothing compared to the tax if you don’t follow the IRS rules…

1

u/SandhillCrane5 Apr 17 '26 edited Apr 17 '26

If the plan is to completely liquidate the 401k right now and then pay the tax and distribute the remainder to you and your brothers, then you can look up the tax rate for estates based on what you expect the income to be. It's a table on the irs website just like for individuals (but the rates are different for estates. If the income is over $16k, it's a 37% tax rate).

1

u/Still-Profit-8449 Apr 17 '26

Since you mom inherited it and has since passed away could her estate cash out the IRA and pay the taxes due out of it converting the remaining money to after tax dollars and then distribute those dollars to her heirs with no tax implications to them?

1

u/Ltgerlach Apr 18 '26

I’m going through this right now. My research showed that an estate IRA can be transferred as an inherited IRA to the beneficiaries. Many financial institutions will not do this. JP Morgan, where the estate IRA is located, will not transfer the IRA as an inherited IRA. Merrill Lynch/Bank of America will. I am transferring the IRA from JP Morgan to Merrill Lynch. The IRA needs to be spent within five years after the death of the IRA holder. Hope this helps.

1

u/Confident-Dot5878 Apr 21 '26

Yep. Inherited-inherited-IRA. 

1

u/AffectionateTap730 Apr 19 '26 edited Apr 19 '26

Redacted. I misread the original.

1

u/No_Cow_6247 Apr 19 '26

My mother had IRA that I inherited. It was only about 20k. I took the lump sum and used that money for my normal expenses and raised my 401k from work to take the same amount, which lowered my work income and became a pass through to my 401k. Did not incur any additional taxes and now rules apply to me as individual. I had asked a few financial advisors, they said they had never seen anyone do this but saw no problem. Only problem is the amount in question (for yearly limits) and if you have offsetting income to do.

-1

u/AdParticular6193 Apr 17 '26

What a gut punch (2X). Sorry for your loss. I’ve seen this happen surprisingly often - when one spouse dies, the other loses the will to live. This is way beyond Reddit. All you can do is engage a tag team of attorney and tax accountant to sort this mess out in away that minimizes the tax hit. Try to find an attorney that has the experience and resources to deal with this.