Early withdrawal for inherited 401K

[Art JC]

Jurisdiction

Georgia

Hello,

I've a question about the penalties or taxes due on cashing out an inherited 401K plan.
I am inheriting a deceased family member's 401K account and I am the sole beneficiary on the account.
I am trying to find out if there are any taxes due (state, federal, etc.) or penalties for cashing out the 401K account once it has been transferred into my name.
The original account owner passed away at age 57 and I am 37 years old.

Thanks

 

[hrforme]

Here's a good article on that: Inherited 401(k)s: Your Complete Guide | The Motley Fool

 

[adjusterjack]

And here's what the IRS has to say about it in Publication 590b starting on Page 6.

2021 Publication 590-B (irs.gov)

 

[army judge]

I am trying to find out if there are any taxes due (state, federal, etc.) or penalties for cashing out the 401K account once it has been transferred into my name.

Please accept my warmest, sincerest condolences on the passing of your loved one.

You can also seek some guidance and various tax information from the entity providing you with the 401K.

Most providers offer publications on the subjects you inquired about, with such publications offered on paper and/or online.

Ask and yee shall see what the funder of your inherited 401K provides.

 

[Tax Counsel]

Hello,
I am trying to find out if there are any taxes due (state, federal, etc.) or penalties for cashing out the 401K account once it has been transferred into my name.
The original account owner passed away at age 57 and I am 37 years old.

Thanks

With a § 401(k) account (it's not a "401K") account, the distributions will be included in your taxable income in the years you take distributions from the account. Whether there will be a penalty depends on other factors which are explained in detail in the IRS publication that AdjusterJack linked you.

 

[Marybell]

Is it allowed for anyone to reply?
Im in the same situation, inherited 401K from my husband (that's the only difference)
Its in my name now at a financial institution.
From what I found out in the past, there is no penalties, 100% of the money can be withdrawn any time from such account. However, I just withdrew a small amount and it showed me that federal tax is 10% while the state was 5%. I chose to postpone the tax payment till the time I file tax (there was such an option)
Let me know if commenting of this sort isn't allowed

 

[Zigner]

Is it allowed for anyone to reply?
Im in the same situation, inherited 401K from my husband (that's the only difference)
Its in my name now at a financial institution.
From what I found out in the past, there is no penalties, 100% of the money can be withdrawn any time from such account. However, I just withdrew a small amount and it showed me that federal tax is 10% while the state was 5%. I chose to postpone the tax payment till the time I file tax (there was such an option)
Let me know if commenting of this sort isn't allowed

Responding is certainly allowed, but it is expected that you will research the matter as it applies to the poster. Your situation is different than the OP's situation because the 401(k) belonged to your spouse.

 

[Marybell]

Responding is certainly allowed, but it is expected that you will research the matter as it applies to the poster. Your situation is different than the OP's situation because the 401(k) belonged to your spouse.

Sorry about it then, I can't edit my message any longer

 

[adjusterjack]

That's OK.

Im in the same situation, inherited 401K from my husband (that's the only difference)
Its in my name now at a financial institution.

I'm guessing you did a rollover or direct transfer to an IRA in your own name. That's not a distribution so there was no tax on that.

I just withdrew a small amount and it showed me that federal tax is 10% while the state was 5%. I chose to postpone the tax payment till the time I file tax (there was such an option)

That was only estimated withholding, not the tax. The actual tax could be any number depending on your financial situation.

Here's the most current publication: Most of the information should be the same for 2022.

2021 Publication 590-B (irs.gov)

 

[Tax Counsel]

Is it allowed for anyone to reply?
Im in the same situation, inherited 401K from my husband (that's the only difference)
Its in my name now at a financial institution.
From what I found out in the past, there is no penalties, 100% of the money can be withdrawn any time from such account. However, I just withdrew a small amount and it showed me that federal tax is 10% while the state was 5%. I chose to postpone the tax payment till the time I file tax (there was such an option)
Let me know if commenting of this sort isn't allowed

No penalties, but the distributions from the §401(k) are included in your gross income for the year of the distribution. If you decide not to have any tax withheld by the financial institution at the time of the distribution just take care that you won't end up owing a penalty for failure to make sufficient estimated tax payments. That penalty is computed the same as interest on the tax that should have been paid in and thus, while technically a penalty under the tax code, it effectively is an interest charge you pay the government.

 

[Marybell]

No penalties, but the distributions from the §401(k) are included in your gross income for the year of the distribution. If you decide not to have any tax withheld by the financial institution at the time of the distribution just take care that you won't end up owing a penalty for failure to make sufficient estimated tax payments. That penalty is computed the same as interest on the tax that should have been paid in and thus, while technically a penalty under the tax code, it effectively is an interest charge you pay the government.

thank you... We are at the end of the year, soon we will be filing taxes. I usually get a refund, thought that the tax I owe on this distribution would be taken care of by reducing the refund amount.
Are you saying that between now and time when I file tax (will try to do it asap), there is a possibility of a tax interest?

 

[Tax Counsel]

thank you... We are at the end of the year, soon we will be filing taxes. I usually get a refund, thought that the tax I owe on this distribution would be taken care of by reducing the refund amount.
Are you saying that between now and time when I file tax (will try to do it asap), there is a possibility of a tax interest?

There is the possibility of an interest charge (though it is called a penalty) if insufficient withholding or estimated tax payments are not made during the year. IRS publication 505 explains the rules in great detail.

 

[justblue]

OP's thread is being hijacked.

 

[army judge]

OP's thread is being hijacked.

Yes, interlopers often appear.

However, an interloper can very often cause responders to provide MORE, rather than less information.

Things can sometimes go awry, but most people can separate the wheat from the chaff.

I think the OP is receiving very sound answers to her/his query from:

@Tax Counsel @adjusterjack & @Zigner

I'm not surprised, as those three responders are known for providing outstanding information.

I acknowledge your observation @justblue

Let's see what happens.

 

[Zigner]

Thank you, @army judge, for the compliments. In this thread, however, I really had very little to offer, as this is far from my area of expertise.