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A distribution of a 401(k)
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 take
60% or more of the account.
There are legal requirements that generally force the beneficiary to take the money out of
the 401(k). A beneficiary is not allowed to roll over an inherited 401(k) to his or her
own 401(k). Under certain 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.
The rationale for these restrictions is that 401(k) tax breaks are designed to help
workers build funds for retirement, not to build an estate that will pass to heirs without
tax. |
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