From 24/7 Wall St. · Vilma Rios · · 1m 20s
Your Dad's 401(k) Plan May Not Be as Flexible as an IRA
Moving a father's 401(k) to an inherited IRA avoids a $34,000 tax spike by spreading withdrawals over 10 years.
In brief
Moving a father's 401(k) to an inherited IRA avoids a $34,000 tax spike by spreading withdrawals over 10 years. Inheriting a 401(k) as a lump sum triggers higher taxes than spreading withdrawals over 10 years under IRS rules. Originally reported by 24/7 Wall St..
Inherited 401(k) Tax Problem
A 58-year-old single woman inherits her father's $400,000 401(k) plan after he dies at 70 in 2025.
Lump Sum Tax Spike
Taking the full balance as a lump sum triggers $123,664 in federal tax versus $8,964 per year for 10 years.
Section 402(c)(11) Transfer
Direct trustee-to-trustee transfer moves dad's 401(k) to inherited IRA without 20% withholding tax.
10-Year Clock Rules
Beneficiaries must empty inherited IRA by December 31, 2035 for a 2025 death, with annual withdrawals starting in year 10.
Tax Bracket Impact
In 2026, $40,000 annual withdrawals stay below 24% tax bracket while lump sum pushes into 35% bracket.
Avoiding 25% Penalty
Missing annual withdrawals triggers 25% excise tax on shortfall, reducible to 10% if corrected within window.
Optimal Withdrawal Strategy
Withdraw enough each year to stay below 24% tax bracket while avoiding Medicare premium spikes.
Tax Professional Advice
Run numbers with CPA or fiduciary advisor before plan sends lump sum check to avoid tax spikes.
The main idea
Inheriting a 401(k) as a lump sum triggers higher taxes than spreading withdrawals over 10 years under IRS rules.
