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Frequently Asked Question

What happens if I inherit someone else's 401k account?

Answer: A distribution of a 401k account to a beneficiary is considered income, and the recipient must pay income tax on it. In addition, the total account is included in the estate of the deceased and is therefore also subject to estate tax. The combination of income and estate taxes can easily take 70 percent or more of the account.

Under most circumstances, a spouse may be permitted to roll the money over to an IRA, but a professional tax advisor should be consulted on this point. There are legal requirements that generally force a non-spouse beneficiary to take the money out of the 401(k). A non-spouse beneficiary is not allowed to roll over an inherited 401k to his or her own 401k or an IRA.

The rationale for these restrictions is that 401k tax breaks are designed to help workers build funds for retirement, not to build an estate that will pass to heirs without tax.

This is for educational purposes only. The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.


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