[BigRuOhio]

I live in Ohio and my father in law just passed away. He was 64 yrs old. He had a 401K worth 85K. There are 4 beneficiaries, all his children (wife is deceased). What will be the process for disbursement, especially with regards to taxes and penalties? Thank you.

[ebaines]

If the 4 kids are named directly as beneficiaries, they will not have to wait for probate to finalize any withdrawals. How the money gets dispersed depends on a few things. In general plans like to send out lump-sums, so as to minimize administrative costs. In this case each beneficiary gets 1/4 of the $85K. Income taxes (federal, state and local) will be owed by each beneficiary on this amount (but not any 10% early withdrawal penalty). I believe but am not sure that for a lump sum payout like this the admin will automatically withhold 20% from the lump sum payout for income tax. Another option for the beneficiaries is that they could decide to roll the payout into a special IRA that in turn would stretch the payouts to them out over a number of years - this can help lessen the income tax hit, as it may keep you from moving into a higher tax bracket. I suggest you contact the plan admin to see what options are available.

All this assumes that your father-in-law's estate is not subject to estate tax - that is , total value of his estate is less than the $2M estate tax exclusion. If his estate is greater than $2M, some amount of estate taxes will be due as well. This is one of the lesser-known problems with 401(k) and IRA plans - if the owner's estate is large enough to trigger estate taxes the total take in taxes from the value of the plan can be 75% or more - 45% for estate taxes, plus 28% for income taxes and say another 5% for state income tax - leaving very little to the intended beneficiary.