What Happens If I Inherit Someone’s 401K Plan?
Learn how receiving a 401k as part of an inheritance could end up costing you most of what you were intended to receive
When you inherit someone’s 401k plan as part of an estate distribution, the money you receive will be considered taxable income. Since 401k plans are designed for retirement, using this money for any other purpose is forbidden. The estate will transfer the money into a cash form and the recipient will receive a monetary amount. Leaving a 401k plan is not a wise estate choice. After estate taxes and the following personal income tax when you receive the disbursement, you will only receive about 30% of the value of the IRA
Can I Roll Over An 401k I Inherited Into My Personal 401k Account
The only person that may be able to roll over money from an inherited 401k account is the spouse of the deceased. Many states allow a surviving spouse to roll over the money from their deceased partners account into their own. However, this is not always the case and should be verified with an experienced financial planner. Any other recipient of the 401k plan cannot roll the money over into any of their accounts. Other than spouse recipients will be considered cash recipients and the money will be taxed as personal income.
Why Is It A Bad Idea TO Leave A 401k As Part Of My Estate
The governing body of 401k plans, the IRS, has stated that 401k money is for retirement and retirement only. Any use of that money for purposes outside of retirement is subject to taxes. The IRS feels that if you leave your 401k plan to a friend or relative to roll into their own account the recipient is not paying their share of taxes. It is for this reason, and this reason only, that you should never leave a 401k as part of your estate.
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