ESOP Distribution to child after death of parent

[rnev11]

Looking for guidance on ESOP distribution to child after death of parent.

Questions:

1. Does child need to file tax return if elects to cash out? 
2. My understanding is there is no penalty for distribution after death however will be taxes as regular income. Is my understanding is correct?
3. Does child have the option of opening up own IRA to roll over funds vs cash distribution? Child is 14 yrs old.

Thank you for the support!

[ErnieS0]

Check with your plan. Most plans have mandatory payout rules on when and how beneficiaries will be paid.

There is no penalty if the distribution is made to a beneficiary due to the death of a participant. 

The amount is taxed as regular income.

You can roll over the distribution into an IRA.

Here is a helpful article by CPA Aaron Juckett: ESOP Distribution & Taxation: How Does it Work? What Are the Rules?

[rnev11]

Than you! Few follow up questions.

Can child roll over ESOP funds inherited from parent that passed away to Roth IRA if child has no earned income?

If minor child takes cash distribution is child required to file income tax return if does not have earned income? Or does surviving parent need to report distribution as income?

Thank you.

[DaveF1006]

No. The only way a minor child can roll the ESOP into a Roth, if they have a Roth account established. One of the requirements of owning and contributing to the Roth is that the child must have earned income. Also if the amount of the distribution is more than $2200, a return must be filed for the child.

The surviving parent may include the income on their  return if the following apply.

1. The child's unearned income was more than $2,200.
2. The child meets one of the following age requirements:
   • a. The child was under age 18 at the end of the tax year,
   • b. The child was age 18 at the end of the tax year and you didn't have earned income that was more than half of the child's support, or
   • c. The child was a full-time student at least age 19 and under age 24 at the end of the tax year and the child didn't have earned income that was more than half of your support.
3. At least one of the child's parents was alive at the end of the tax year.
4. The child is required to file a tax return for the tax year.
5. The child does not file a joint return for the tax year.

Please read this IRS source for more information.