Do I pay taxes on an inherited 401k?

[Sue444]

I only had to withdraw my parents portion, as she did not do so before the  year she passed away.  The rest remains in the account of which I have up to 10 years to fully liquidate.  Do I pay taxes on the amount withdrawn in 2021?

[ColeenD3]

Yes, proceeds from an inherited IRA are taxable.

Generally speaking, only the distributions from an inherited Traditional IRA are taxable, just as they are for non-inherited Traditional IRAs. Distributions from an inherited Roth are not taxable unless the Roth was established within the past 5 years.

Inherited 401(k) plans are (or eventually will be) taxable but the amount of tax depends on the 401(k) plan rules. For example, many 401(k) plans require a lump-sum distribution upon the death of the account holder. The surviving spouse can roll the 401(k) into an IRA, but if the beneficiary is not a spouse, they might be forced to take a lump-sum payment and the tax bill that goes along with it.

When it comes to inherited IRAs and other retirement plans, the rules can get pretty complicated, but we're here to help. When you indicate in TurboTax that your IRA or plan was inherited, we'll ask a series of questions to determine how much, if any, is taxable on this year's return.