Sorry here is another "simple" question, or should be...

Details:
My father had a workplace 401k with a pretty substantial balance.
He listed my mother as the beneficiary, but she passed before he did. So basically no beneficiary listed.
It has been sitting in the 401k now for over a year and now my sibs and I are now ready to distribute.

I called Fidelity and they said in order for them to close the 401k and distribute the funds to my dad's estate account, we first have to do the RMD.

If we take the RMD now (in Oct) is it best to let Fidelity take out the 22% (or whatever) in taxes prior to distributing the RMD to my dad's Estate account? When we file our individual taxes next April, would my sibs and I have to remember that the taxes have already been paid and enter that in our tax filing? Or would it be documented in each of our K-1's from the Estate filing?

Sorry, I know these are dumb questions... and we do have access to my dad's accountant but that is like pulling teeth.

Not my line of work, so take this with a grain of salt, but I would take the RMD into the estate without the taxes, pass through the estate, distribute to the beneficiaries and let them file the taxes. Paying the tax within the estate may cost you more since the 37% bracket starts at anything over $15,650 in an estate. It also just seems like a hassle to have to figure vs. "here's your money, put it in your taxes as regular income and proceed as normal".

Taking no withholding, you want to be sure to distribute all of the inflows out to the beneficiaries within the same calendar year. Doing so, the Estate gets an Income Distribution Deduction equal to the received IRA distribution resulting in zero taxable for the Estate. The beneficiaries will be allocated income on their K-1s equal to the cash received.

I thought there was no estate / inheritance tax until it was greater than something like 14 million

One other avenue you might consider is having Fidelity create an inherited IRA for each beneficiary instead of cashing it all out. Then you have to take the annual RMD from your new account based your dad's age. But you can leave the money there to grow and whatever you take out just generates a 1099 for you.

No clue on the tax advantages of cashing out now and having the estate pay versus you paying later.

Not a CPA but that worked nicely for my wife and BIL after my FIL passed. It was all handled by Edward jones.

kyledr04 said:

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One other avenue you might consider is having Fidelity create an inherited IRA for each beneficiary instead of cashing it all out. Then you have to take the annual RMD from your new account based your dad's age.

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If I understand the facts correctly, I don't think this is an option as the children weren't named beneficiaries of the IRA. The Estate is the default beneficiary and must receive the payments.

Interesting. Never thought of that.

SquarePants is correct. Initially I called Fidelity a few months ago and they told me they thought an Inherited IRA would probably be possible, but this rep wasn't in the Workplace 401k dept... so they transferred me to the rep that handled this particular company's 401k and he said it is not possible since there were no living beneficiaries listed on my dad's 401k.

Seems like they could make these types of things SOOO much easier that a caveman (ME!) could do it!

TxAger said:

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Seems like they could make these types of things SOOO much easier that a caveman (ME!) could do it!

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It is easy enough if you name primary and secondary beneficiaries and follow the process.

Ultimately, the government wants its taxes and will ensure that it gets them.

Naming beneficiaries and keeping them updated with life events is so critical.

Agreed! I talked to my dad's banker (SVP at the bank) a few weeks ago and he told me he brought it up several times to my dad... the need to remove my mom as beneficiary and add the kids (or other)... My dad told him NO! multiple times so banker gave up.

Caliber said:

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TxAger said:

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Seems like they could make these types of things SOOO much easier that a caveman (ME!) could do it!

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It is easy enough if you name primary and secondary beneficiaries and follow the process.

Ultimately, the government wants its taxes and will ensure that it gets them.

Naming beneficiaries and keeping them updated with life events is so critical.

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My dad had his ducks in a row and the process was very simple for my mom/myself for what he left. My mother in law had a sudden death and nothing was setup... She had a paper "will" that said to leave things to grandkids. We didn't know her iphone code (and never figured it out). The hoops my wife and her sisters jumped through to get things from point A to point B took months.

regarding having no tax withheld from the inherited 401k distribution... I would assume we would then have make a quarterly estimated tax payment to the IRS? So we each would have make an IRS payment by the Jan 15th quarterly pmt date.

TxAger said:

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regarding having no tax withheld from the inherited 401k distribution... I would assume we would then have make a quarterly estimated tax payment to the IRS? So we each would have make an IRS payment by the Jan 15th quarterly pmt date.

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That would be the most straightforward approach and would absolve the Estate of any responsibility for income taxes.

Alternatively, you could have withholding taken and allocate it to the beneficiaries via Form 1041-T. That form would be filed with IRS by March 6, 2026. It seems like a lot of trouble when the quarterly payment option is available. It might be worth it if this distribution was occurring in the first quarter of the year instead of the last.

Any CPA/Estate Lawyer can answer this but if it were me I'd take the RMD in a lump sum from the 401k and let the estate pay the taxes. The estate is required to file a final tax return. And just about every competent custodian is going to require the RMD be paid before anything else. If dad has any charity requests in his will use that RMD to pay the charity, that will reduce or eliminate taxes on that distribution. Then divvy the 401k as per whatever distribution scheme the probate judge decides. If there's no beneficiary named you'll have to go thru probate. Once it's in your name you have 10 years to withdraw all of it.
Estate lawyers aren't that expensive, and if a novice is asking a sports message board for help with a "sizable sum" and then may wing it himself well, they deserve whatever happens. And FWIW Fidelity has experts you can consult with, over and above those folks who answer the phone. They will also let you do whatever you want to do as long as it's legal but they'll record every phone call to use against you should you file a complaint.

jamey said:

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I thought there was no estate / inheritance tax until it was greater than something like 14 million

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These are different things. If someone had $20MM of cash in an account and was withdrawing it when they were alive, then there is obviously no tax on that. But if they died and that money was being transferred to a beneficiary, only the amount over the estate tax threshold would be taxed. The estate tax is a tax from simply transferring it from one person to another. That's why an estate tax is considered a double tax, because the taxes have already been paid on that money when it was earned and now it's being paid again.

In the case of a 401k, taxes have never been paid on this account, so if the original owner was withdrawing, it would be subject to tax. If the beneficiary is withdrawing, they are paying the same tax that the original owner would have paid when withdrawing (well not exactly the same depending on income, etc.). If we didn't tax 401k withdrawals after death, then all the income in that account was never taxed at any point even when it was initially earned.

I'm sure someone can explain that better, but hopefully that clears up your question a bit.

jamey said:

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I thought there was no estate / inheritance tax until it was greater than something like 14 million

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There are two taxes relative to estates. The first is on the value of the estate, and what you are referring to. The other tax is an income tax based on the income earned while the assets are still held in the estate. That income tax is owed when the estate income (after expenses and distributions) is $600 or more.

OldArmyCT said:

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Any CPA/Estate Lawyer can answer this but if it were me I'd take the RMD in a lump sum from the 401k and let the estate pay the taxes.

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The downside being that there likely will be substantially more taxes paid by all involved (the estate and the beneficiaries) if it is done that way.

TxAger said:

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regarding having no tax withheld from the inherited 401k distribution... I would assume we would then have make a quarterly estimated tax payment to the IRS? So we each would have make an IRS payment by the Jan 15th quarterly pmt date.

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Maybe, maybe not on the estimated tax payment. Also, when you talk to your tax guy or gal, be sure to consider having a fiscal year end for the decedent's estate rather than a calendar year. That can buy you some deferral time if that best benefits all involved.