Inherited 401(K): A Guide for Beneficiaries

Jun 21

Most workers participating in a 401(k) plan attempt to salt away as much of their income as possible into the retirement plan; at minimum, they save enough to earn the company’s match Hopefully, the nest egg is sufficient to maintain a comfortable retirement.

In many instances, however, people accumulate more money than is necessary for retirement before they pass away. In these circumstances, the account owner’s beneficiary receives the remaining funds in an inherited 401(k).

Funds invested into a 401(k) usually grow tax-deferred, meaning the contributions reduce the participant’s taxable income for the year, but then the employee owes taxes on the distributions much later when the funds are withdrawn in retirement If the account owner dies without paying taxes on all their savings, the 401(k) beneficiary becomes responsible for paying the taxes instead.

Beneficiaries must pay income tax on the amount they inherit (in addition to any estate tax owed). However, different... ...