What would the tax consequences be if my father distributes $25,000 to each of his three children from his 401(k) when he passes?
My father is 81 years old and his only income is from Social Security and approximately $2,000 per year as a required minimum distribution from his 401(k). His total income is approximately $30,000.00 annually. When he passes, he wishes to leave each of his three children $25,000.00 each. What are the tax consequences of the three $25,000 distributions?
Assuming your father has passed his beneficiary will recieve their portion of the 401(K) based on his beneficiary form.
The distributions would be taxable to the persons receiving the distributions. In this case the three children. Each child would be responsible for paying their own taxes on the distributions at their own tax rates.
Best of Luck.
Simply put, the distribution would be taxed as ordinary income at your tax bracket. However, a lump sum distribution could bump you up into the next tax bracket. Depending upon your circumstances, it may be wise to spread the distribution out. I believe your options are immediate (lump sum) distribution, 5-years and lifespan distributions. If you decide to hold onto the assets (which will be kept in a Beneficiary IRA to prevent immediate taxation) you will have to continue to take the Required Minimum Distributions. These are called RMDs and there is a formula so you can figure out how much you will be required to withdraw on an annual basis. Great question. Thank you.
Joe Inskeep, CFP
If the distribution comes from his traditional IRA/401k, it would be taxable to the children as ordinary income (just like it would be for your father if he distributed it to himself while he was alive). If it's a Roth IRA/401k, it would be received tax-free by the heirs (again, it keeps the same tax treatment that he would have received if it was distributed during his life).
Thanks for your question!