Assets from Parent's Estate

[dfwsharp1967]

Hello and thanks to those of you who have given me guidance on this topic before.  My parents both passed away this year and I put all their cash assets into an estate bank account including from the sale of their home.  The estate is about to be closed in probate and all debts have been paid.  I understand that as a sole heir, I will not owe taxes on this inheritance.  (I hope that is accurate as it is under the limit for inheritance taxes).   The one asset that I did not "cash out" and deposit into the estate account is my Dad's 401k.   Since the stock market is down right now, I did not want to "sell low."   I had the assets transferred to the name of the Estate and its Tax ID number.

Here are my questions:

1). Do I have to cash this out now and add the cash to the estate bank account prior to the probate close?

2). If I do have to cash it out, would I report the income and taxes on the Estate tax return?

3.) If I don't have to cash it out now and it stays under the Estate tax ID, are there limitations on how long it can stay under that Tax ID?  

Thanks for any advice you can offer.

[Anonymous_]

I am sorry for your loss.

Two questions:

1) In which state did your parents pass away? 

2) With respect to your dad's 401(k), was a beneficiary not named?

[note that an inheritance tax (which few states impose) is different than an estate tax]

[dfwsharp1967]

Here are the answers to your questions.

1) In which state did your parents pass away?  Tennessee

2) With respect to your dad's 401(k), was a beneficiary not named?

My Mom was the beneficiary but she died prior to him.  The account is now accessible to me only.

[Mike9241]

best would be to contact the 401k trustee/administrator to find out your options. 

here is a summary but an immediate 100% cash out should not be required.

The rules governing how non-spouses inherit 401(k) changed when the Secure Act came into effect. The new law mandated that beginning in 2020, non-spouse beneficiaries of 401(k)s, IRAs and other defined contribution plans had to take full payouts within 10 years after the death of the initial account owner, sometimes referred to as the 10-year rule. That means some non-spouse beneficiaries would miss out on tax-deferred growth that could have stretched decades.

Here are the three main considerations of inheriting a 401(k) as a non-spouse:

1) Mandatory Payout Rule Exceptions: The mandatory payout rule doesn’t apply to minors until they’ve reached the age of majority, at which point, they have 10 years to empty the account they inherited. Additionally, people who meet the government definition of disabled or chronically ill can stretch out withdrawals for their lifetime. Beneficiaries who are not more than 10 years younger than the original account holder at the time of death are also allowed to take distributions under the old rules.
2) Age of Account Owner: What you do with an inherited 401(k) as a non-spouse is tied to how old the account owner was when you inherited the plan and the plan’s distribution rules. If the account owner hadn’t yet turned 70 1/2, it’s possible that the plan may allow you to spread distributions out over your lifetime or spread them out over a five-year period. If you take the five-year option, you may have to fully withdraw all of the account assets by the end of the fifth year following the account owner’s passing. In either case, you’d owe income tax on the withdrawals.
3) Account Rollover: You could also roll the account over to an inherited IRA if the plan allows it. In that scenario, the required minimum distributions would be based on your life expectancy, assuming the account owner hadn’t begun taking them yet. If they had already started taking minimum distributions, you’re required to continue taking those distributions. You could, however, base the distribution amount on your life expectancy instead of the account owners.

[Anonymous_]

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@dfwsharp1967 wrote:

My Mom was the beneficiary but she died prior to him.  The account is now accessible to me only.

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You were not named as the contingent beneficiary?

Any distributions from the estate, with respect to the 401(k), are fully taxable. The timing of the distributions can be found in Mike's post.

[Tennessee does not levy an inheritance tax]

[dfwsharp1967]

I was not named as a contingent beneficiary unfortunately.  Would that have impacted the taxability of distributions?

[Anonymous_]

Not the taxability, but more likely just the timing (probably subject to the 10-year rule - see Mike's post).

[dfwsharp1967]

If I cash it out and put the money into the estate account, would I be responsible for paying taxes on it?  Or would it need to be reported on an "estate" tax return?  Or my parents final return?

[Anonymous_ · Accepted solution]

If the account wound up in the estate (due to the fact that there was no named beneficiary), then withdrawals are reported on the estate income tax return (Form1041) and the tax is either paid by the estate or the income is passed through to, and any tax due paid by, the beneficiary(ies).