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What happens to 401k and other retirement accounts when the "owner" passes away?

Answers:1   |   LastAnswerAt:2009.12  

Nadeem M 
Asked at 2009.12.18 23:46:56
When someone dies, leaving an estate to their beneficiary, it could include stocks, bonds, investment accounts, retirements, real property, etc.

I believe everything under $2 million passes to the heirs without any tax obligation. (Is this correct?)

My question is about the tax-deferred retirement accounts (non-ROTH) that collect ordinary income tax when you draw the funds. Would this tax be required from the heirs?

answer digdowndeepnseattle  Answered at 2009.12.18 23:46:56
First, the money passes to the beneficiary outside of probate so it doesn't fall under the estate tax rules. No different than insurance proceeds. One thing to keep in mind is that the "owner" of the 401k account is not the individual (no matter what you've heard or believe this is not true). The owner of the account is the trust. The assets are held for the benefit of the individual participant; which is why it's treated like insurance proceeds.

Upon the death of the individual participant, it is taxable income but not until the money is actually withdrawn. Recent tax law changes allow both spouses and non-spouses to roll over beneficiary accounts and postpone the taxable distribution. So the taxation can be delayed. However, the life expectancy of t he original holder of the assets follows the account and it must be paid out no later than it would have been had the original holder been alive.

So, bottom line is that you can delay the tax man but you can't evade him.
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