law office of michelle adams

Does a Beneficiary have to Pay Taxes on 401(k)?

Legacy Planning: The Ultimate Gift

Book an Initial Call

Does a Beneficiary have to Pay Taxes on 401(k)?

September 7, 2022 •  Law Office of Michelle Adams
If you anticipate inheriting a 401(k) from a parent, a spouse or someone else, it’s important to know your options for minimizing tax liability.

There are many complicated rules for inheriting assets in the form of retirement plans, workplace plans and Individual Retirement Accounts (IRAs), says a recent article titled “How Much 401(k) Inheritance Taxes Will Really Cost You” from The Madison Leader-Gazette. Any assets passed from one person to another in the form of a 401(k) are taxable. You’ll want to be prepared

How are Inherited 401(k)s Taxed?

The inheritance rule for 401(k) tax usually follows the same path as the rules used when making contributions or withdrawals to tax deferred retirement plans. When a person dies, their 401(k) becomes part of their taxable estate.

This means that any taxes due on earnings not paid during the person’s lifetime need to be paid.

Traditional 401(k) plans are funded with pre-tax dollars. This is great for the saver, who gets to defer paying taxes while they are working. When they retire, withdrawals are taxed at their ordinary income tax rate, which is typically lower than when they are working.

There is an exception with Roth 401(k)s, where contributions are made with after-tax dollars and qualified withdrawals are tax free.

How the IRS taxes an inherited 401(k) depends on three factors:

  • The relationship between the account owner and the heir
  • The age of the heir
  • How old the account owner was at the time of death.

Who Pays Taxes on an inherited 401(k)?

The beneficiary who inherits the 40(k) is responsible for paying the tax. They are taxed at the heir’s ordinary income tax rate. This could push the heir into a higher tax bracket.

What Should I Do with an Inherited 401(k)?

If your spouse was the original owner, you may leave the money in the plan and take regular distributions, paying income tax on the withdrawals. You may also roll it over into your own 401(k) or to an IRA. This allows the money to continue to grow tax free, until withdrawals are taken.

Can I Avoid Taxes on an Inherited 401(k)?

The only way to avoid taxes on inherited 401(k) would be to disclaim the inheritance, at which point the 401(k) would be passed to the contingent beneficiary. If you don’t need the money, don’t want the tax headaches, or would rather see it go to another family member, this is an option. Most people pay the taxes.

Planning For Taxes When Creating an Estate Plan

Talk with your estate planning attorney about your taxable assets and how to manage the tax liabilities to your heirs. There are numerous tools to address these and related issues; your heirs will be grateful for your foresight and care. If you would like more information, please contact our estate planning law firm at (720) 740-4463 to speak with an experienced attorney.

Reference: The Madison Leader Gazette (July 29, 2022) “How Much 401(k) Inheritance Taxes Will Really Cost You”

Speak With Michelle
Book an Initial Call
Schedule an available time to speak with Michelle Adams, Esq. I look forward to meeting with you!
Book an Initial Call
Stay Informed
Join Our eNewsletter
Stay informed and updated by subscribing to our eNewsletter!
Subscribe Now!
Educational Resource
Order a Copy of "7 Gifts for a Lasting Legacy"
Regardless of your income level or celebrity status, everyone will leave a legacy. And author Michelle Adams helps you to be intentional about building a strong family legacy. Order a copy today!
Order Now
KEY NOTE SPEAKING / WORKSHOPS
Keynote Workshop
We frequently offer workshops to parent groups, faith-based organizations, schools and companies.
Workshop Request
Law Office of Michelle Adams

2373 Central Park Blvd, Suite 100
Denver, Colorado 80238

Get Directions
Integrity Marketing Solutions - Estate Planning Marketing
Powered by
magnifiercrosschevron-down