topic Re: Inherited 401k tax rate in Retirement tax questions

Inherited 401k tax rate

Svoigt63 — Sat, 12 Apr 2025 18:11:41 GMT

My son inherited part of a 401k from his aunt. He is required to take distributions for the entire amount within 10 years. He took his first distribution in 2024, with ni change to his tax bracket. The 1099-R indicated in Box 7, a code of "1." He is 21. The 10 year rule is going to force him to take the distributions before he ever hits 59 1/2. Is the 1099 form wrong in that code? Should it be a 2, giving him an exception? I switched them back and forth, and it does seem that the 2 is giving him the correct refund. The code of 1 seems to be tacking on the 10% early withdrawal penalty. Which code is correct? And am I understanding that he should NOT be paying the extra 10% for early withdrawal under 59 1/2?

Re: Inherited 401k tax rate

dmertz — Sat, 12 Apr 2025 19:03:36 GMT

Something is definitely wrong here. Code 1 indicates a distribution from his own retirement account, not a distribution from an inherited account. A distribution from an inherited account would have code 4. Does this Form 1099-R have the IRA/SEP/SIMPLE box marked?

I assume that your son's aunt died in 2023. Did your son receive a 2023 Form 1099-R related to this inherited 401(k)? Is so, what is the code in box 7 of that form. Normally a 401(k) would make a direct rollover to an inherited IRA, reported on a 2023 Form 1099-R with codes 4 and G in box 7 and the IRA/SEP/SIMPLE box not marked.

Re: Inherited 401k tax rate

NCperson — Sat, 12 Apr 2025 18:59:51 GMT

@Svoigt63 I suspect the code should be a '4' which means it was inherited from someone else, which means there is no 10% penalty.

check with the 401k Administrator for an explanation is my suggestion.

Re: Inherited 401k tax rate

Svoigt63 — Sat, 12 Apr 2025 19:31:23 GMT

His aunt died in late 2023. By the time we completed all paperwork the transfer was completed and his account set up in early 2024. We did not get any forms for 2023. This is the first and only one received so far for this account. The 2024 1099-R does not have the IRA/SEP/SIMPLE box checked.

I was unsure of what the code should be, but it did not seem right to me. Sounds like it IS wrong, and I need to go back to the investment company to get correction.

Re: Inherited 401k tax rate

Svoigt63 — Sat, 12 Apr 2025 19:32:41 GMT

Thank you for confirming. This is the first I have ever dealt with this, so was unsure of those codes. I will go back to the plan administrator to question this.

Re: Inherited 401k tax rate

dmertz — Sat, 12 Apr 2025 20:12:36 GMT

Nothing about this Form 1099-R makes any sense. It will need be sorted out with the investment company.

Re: Inherited 401k tax rate

VolvoGirl — Sat, 12 Apr 2025 20:17:26 GMT

Just a stupid thought...... whose ssn is on the 1099R? The Aunt's or his?

Re: Inherited 401k tax rate

dmertz — Sat, 12 Apr 2025 20:28:41 GMT

@VolvoGirl wrote:
Just a stupid thought...... whose ssn is on the 1099R? The Aunt's or his?

That would still be problematic since the aunt died in 2023 and no distributions should have been made to the aunt after her death.

Re: Inherited 401k tax rate

Svoigt63 — Sat, 12 Apr 2025 22:25:43 GMT

Not stupid! I never thought to check that, but I just did. It is my son's SS number.