IF I INHERIT MONEY FROM MY PARENT’S 401(K), DO I HAVE TO PAY TAX?
Answer: Generally, yes, you are taxed on distributions from a 401(k).
If taking a 401(k) distribution, the proceeds will be subject to income tax. However, the person inheriting those funds is not required to take an immediate distribution. She can either:
• Leave the money in that same 401(k) account;
• Have a roll-over to her own job-related plan, if allowed by that plan; or
• Have a roll-over into her own or even another inherited I.R.A..
If the inheriting persontook a distribution, however, she would not be subject to pay any 10 percenttax for early withdrawal. This special rule applies no matter the age of the inheritor.

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Inheriting money can be seen as a blessing, a windfall that can change your life for the better. However, with the inheritance of money comes the responsibility of knowing the potential tax consequences. If you’ve recently inherited money from your parent’s 401(k), you may be wondering if you’ll have to pay tax on this inheritance.

The short answer is, yes, you will have to pay tax on the inheritance, as it will be considered ordinary income. The amount of tax you will have to pay depends on various factors, including your income tax bracket, the amount of money you inherit, and whether or not your parent had already paid taxes on the 401(k) funds.

If your parent had already paid taxes on the 401(k) funds, your inheritance will likely be taxed at the lower capital gains tax rate. However, if your parent had not yet paid taxes on their 401(k) funds, the full amount of the inheritance will be considered ordinary income and taxed accordingly.

One option you may have to reduce the potential tax burden is to roll over the 401(k) funds into an inherited IRA. This will allow you to defer taxes on the funds until you withdraw them in the future, potentially reducing your current tax liability.

It’s important to note that the tax laws surrounding inherited 401(k) funds can be complex, and it’s always a good idea to consult with a knowledgeable tax professional to help you navigate them. They can help you understand the potential tax consequences of inheriting this money, and help you identify any strategies that can help you minimize your tax burden.

In conclusion, if you inherit money from your parent’s 401(k), you will likely have to pay tax on the amount you receive. However, there are steps you can take to reduce your potential tax liability. Speak with a tax professional to determine the best course of action for your situation.