What is the Best way to Handle a 401K Distribution to Estate?
Hi and thank you for taking the time to read and respond to my inquiry. My brother passed away – he was 45, single, never married, no kids, no will, and he had a 401K plan with his parents as beneficiaries who had both passed prior to his death. I am one of his 3 brothers and have been deemed administrator of his Estate (it has gone through probate, my other brothers signed waivers to allow me to be the administrator, etc.). I reached out to the 401K plan administrator and I am currently filling out their forms for distribution of his 401K. I would like to understand my options here as to how to have the 401K distributed to the estate (I assume a lump sum distribution) and also how to handle any taxes – should I have any federal and/or state taxes withheld? If so how much and if not how are taxes handled after the distribution to me and my 2 other brothers? Please advise as to the easiest and best way to handle this.
Thank you,
Pete
Permalink Submitted by William Tuttle on Mon, 2019-01-28 15:47
That should be good enough until Alan gives the detailed options.
Permalink Submitted by Alan - IRA critic on Mon, 2019-01-28 17:05
401k plans almost always require a lump sum distribution to the estate, and the tax code does not allow assignment to inherited IRAs for estate beneficiaries of a qualified plan. The estate will file a 1041 for either a calendar year or fiscal year if that is an advantage based on the date of death and other aspects of his estate. Withholding by the plan is not required and it is best not to elect any since the distribution will be passed through to the estate beneficiaries on a K 1 anyway. Knowing the balance of the plan, it should be easy to just advise each beneficiary how much taxable income they will receive and tell them to increase their withholding from other sources or plan on making estimated tax payments for the year starting 4/15. They can each determine how much additional taxes they should pay according to their own individual tax situations.
Permalink Submitted by Bruce Steiner on Mon, 2019-01-28 17:59
If the plan will allow it (though as Alan pointed out it may not) you could spread the distributions over several years as long as you take it all by the end of the fifth calendar year following the date of death. That would avoid bunching the income into a single year, and would allow you to match the income against the administration expenses. By using a fiscal year you might be able to spread the income over six or seven taxable years.
Permalink Submitted by Peter Despres on Mon, 2019-01-28 18:43
Thank you all for your fast responses! I am assuming since the balance of the 401K and his estate are small ($45,000 for the 401K and another 20K in assets) and since it is getting doled out to 3 people that I should just do the lump sum and advise my brothers of their additional income? Do i still need to do a 1041 for the estate? Thank you. Pete