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scotielee's avatar

How can I be exempt from paying taxes on my deceased father's 401k distribution?

Asked by scotielee (117 points ) April 18th, 2011

My father passed in March of 2010 and had recently received part of his 401k. When filing his final return and entering the 1099-R, I go from receiving nearly $4,000, down to owing $1,200. I am trying to find a way out of having to pay those taxes on the distribution. Please help.

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7 Answers

Rarebear's avatar

Find a good accountant.

creative1's avatar

You would have to see someone now but had you put the money into in ira or a roth ira instead of taking it as a distribution it would have saved you. I think though you have a limited amount of time to do that and I believe it was within 30 days. At this point I don’t know if making any addition contributions to an ira would help your situation or not I would suggest seeing an accountant as @Rarebear suggested

cazzie's avatar

Without death estate planning this is difficult. Find out if there is anyway to defer doing the return and receiving the money as part of his estate. It sounds as if the money is gearing you into another, less than warranted tax bracket. It will mean having the power of attorney to cash out the 401K plan. Alternatively, see if you can simply have the plan transferred over to your own (if you are sole beneficiary) and not realising any cash now, but seeing it added to your own retirement plan.

You need to have a chat with a tax/estate planning specialist.

lillycoyote's avatar

Everything about 401ks, what happens when you are the beneficiary of a deceased person’s 401k, whether and if you can roll it over into something to avoid taxes now and the taxes due on them are very strictly regulated by law. $1,200 in taxes on a $4,000 401k seems excessive but it may be what’s due according to law. I also advise that should talk to an accountant.

And I’m very sorry to hear about your father. I lost my dad in 2007 and I still miss him every day. The estate business and sorting it all out, all the financial stuff and the taxes can be daunting. It can get very complicated and unless you’re really good at that kind of stuff I absolutely advise consulting professionals.

filmfann's avatar

I went thru this 6 years ago. I used an accountant, and I still ended up paying most of it in taxes.
Hope you are luckier than I was.

lillycoyote's avatar

My dad only had IRAs and CDs, he had a good pension so no 401k. I cashed own out several years ago and to a big hit in terms of taxes. I think the big problem with taxes on a 401k is that the employees contribution is pre-tax money. The money is deducted and put into your 401k and then you federal and local income taxes, in any are calculated after the contribution is deduct so taxes have never been paid on that income. If you have a 401k for 20 or 30 years it should work out o.k. your earning money on more money and don’t pay taxes until you begin to take distribution. If you cash out your 401k in a lump sum you take a pretty good tax hit as opposed to paying taxes on smaller amounts during your retirement. If he took a lump sum payment last year that can result in a bigger tax hit.

But I don’t know how 401Ks work when someone dies. If he died in March 2010 you need to do his personal taxes for 1/1/10 through the date of his death and a separate then taxes for the estate from the date of his death through 12/12/10. Is that what you’re doing? Of course, I’m sure you are. If you’re doing his personal taxes then he, essentially is paying his taxes on the $4000 dollars, not you. You have to pay whatever he would have paid but, only in relation to his income before he died it gets complicated when people die in the middle of the year, which they almost always do. You’ll probably get a refund if you haven’t figured that out yet.

optimisticpessimist's avatar

If I understand your question correctly, you are preparing your father’s 2010 tax return and he was the one who took a distribution shortly before his death. I would take it to a professional as they may find some deductions you are unaware of. You did not mention if his death was sudden (my condolences) or if he had an illness for which he received medical care causing medical expenses.

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