[Hdft123]

My father died June 30, 2010. He has a 401k plan with approximately $400k in California. Are there any other taxes due besides ordinary income tax. He listed me as the benificary and also as in the trust to receive 100%.

[ebaines]

If you are listed you as the named benficiary on his 401(k) account, you have these options:

1. Leave it alone - depending on the rules of the 401(k) they may allow you to just keep the account in place, but now under your name. The advantage is no taxes are due (yet), and the account continues to grow tax-deferred. However, many plans don't allow this, and require the heirs to withdraw funds they've inherited - you'll have to ask the plan admin whether this option is available.

2. Take the withdrawal now and pay income tax, plus the 10% early withdrawal penalty for being under age 59-1/2. The down side of this is that you may get pushed into a higher tax bracket. You may be allowed to stretch distributions out over several years - again, plans vary.

3. Roll the 401(k) over into your own inherited IRA. That way you pay no tax now, and avoid the 10% penalty. This is actually a new option available to non-spouses for the first time starting in 2010. This is what I would recommend.

You mention a trust - not sure what that means, as I assume you are the named benficiary of the 401(k), not the trust, correct?

[AtlantaTaxExpert]

ebaines, I do not believe that, as an heir, HDFT123 is required to pay the 10% Early Withdrawal Penalty; see IRS Pub 17, page 81, middle column under "Exceptions to tax", third bullet under General exceptions.

[ebaines]

ebaines, I do not believe that, as an heir, HDFT123 is required to pay the 10% Early Withdrawal Penalty; see IRS Pub 17, page 81, middle column under "Exceptions to tax", third bullet under General exceptions.

Thanks for the correction. I'm afraid I misread bullet point 4 from here:

401khelpcenter.com - 401k Beneficiaries

So no 10% early withdrawal penalty is due on withdrawals by the heir from the 401(k).

[AtlantaTaxExpert]

Noted; however, I agree with your item #3 - Rolling the amount over into another IRA is probably the best option.

A partial distribution up to the next tax bracket point can be taken to allow for some immediate benefit from the inheritance, but the bulk of the money should be rolled over into an IRA.