Beneficiary's $750,000 401(k) Cash-Out Triggers $120,000 Extra Tax Under 10-Year Rule
Updated
Updated · 24/7 Wall St. · Jun 15
Beneficiary's $750,000 401(k) Cash-Out Triggers $120,000 Extra Tax Under 10-Year Rule
1 articles · Updated · 24/7 Wall St. · Jun 15
Summary
$750,000 inherited 401(k) taken as a lump sum can cost roughly $120,000 more than spreading withdrawals over 10 years, after a 58-year-old beneficiary chose a check instead of an inherited IRA.
At $200,000 of household income, a year-one cash-out can push taxable income near $950,000, driving part of the distribution into the 37% federal bracket instead of keeping annual withdrawals in the 24% bracket.
The tax gap includes about $62,500 in extra federal tax, another $25,000 to $35,000 in higher-tax states, plus possible Medicare IRMAA surcharges and other spillover costs.
That choice is hard to reverse because a 401(k) paid directly to the beneficiary cannot be rolled into an inherited IRA, and the plan's 20% withholding is only a prepayment, not the full tax bill.
The article says beneficiaries should complete a trustee-to-trustee transfer before Dec. 31 of the year after death, then schedule withdrawals over 10 years; if the parent had begun RMDs, annual payouts in years one through nine are still required.