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forestguy57 · Sep 7, 2007, 07:30 PM

I've just been informed I was still named as beneficiary on my ex-wife's 401k retirement plan at work. She passed away unfortunately this year.

Her daughter has informed me as to my beneficiary status and asked that I give her and her surviving son the funds in the account.

When we divorced in 2006, I agreed not to ask for my share of her retirement although I was married to her during the complete time she had the 401K account.

I am trying to determine what my tax liability would be to take the disbursement of the complete amount ( approx $20,000.00).

The daughter has indicated she would be willing to share in the proceeds of the 401K but I don't want to get stuck paying taxes on the funds once they are distributed.

I want to do that right thing by the daughter and her brother but feel also that the proceeds from the 401K should have been split equally when we divorced.

Is there a formula to figure the tax on the amount disbursed?

I am on SS disablilty and was on same when we were married.

I would appreciate any comments or suggestions regarding this predicament.

Regards,

Randy

ebaines · Sep 10, 2007, 10:05 AM

One course of action would be to take a distribution in full, pay the income taxes due, and gift the remainder to your ex-wife's daughter. Yes, you would have to pay income taxes on the distribution (federal and state, depending on where you live). The distribution is taxed as ordinary income, so the rate will depend on amount of your other income, deductions, credits, etc. The only way to accurately determine the true tax amount is to calculate your taxes two ways - one with the distribution and one without. Or, as an estimate, simply use your tax bracket. If you are in the 25% income tax bracket for example, plan on owing 25% of the distribution in taxes, and then gift the remaining 75% to your ex-wife's daughter. You might remind her that even if her mother had updated her beneficiary designation, she (the daughter) would owe taxes on the distribution just as you now do, so the result is the same.

You might find this site helpful:
401khelpcenter.com - What You Need to Know When You Inherit a 401k

ScottGem · Sep 10, 2007, 10:27 AM

The site be linked to has good info. One thing you might consider is rolling it over into an IRA, (if you qualify) and making the daughter the beneficiary.

Unless she needs the money now.