My dad died at age 77. He hada 401K and IRA, both of which he didn't take distribution on since 2004.?

Question

What's the best way to get the least tax hit on this money? I'm administrator of his estate. And the only next of kin.

Answer 1

Please consult with a qualified tax advisor on this -- a CPA or tax attorney who specializes in estates, NOT some part-timer at a storefront tax return mill! There are issues on the required distributions that he did not take and taxes that his estate will have to pay before you can settle the estate. If anything is left when that is done, whether or not you will have to pay any tax yourself on the funds will depend upon how the funds are distributed to you. The tax advisor can explain the options and help you determine the best way to proceed.

It's not possible to give you a correct answer here without a LOT more information.

Answer 2

You have two issues here.
First is the need for the estate to contact both of the managers of these accounts and verify what the mandatory distributions were for the years in question (2005, 2006, and 2007). Next you will need to verify if the IRS received the necessary taxes and penalties for any required distributions that were not made. The estate will have no additional payments to be made if the taxes and penalties were paid by your dad. If not the estate will have to make such payments as necessary to allow the estate to legally distribute any money from these accounts. The fund managers should have no problems telling you the necessary required withdrawals that should have been made.
The IRS may take a little longer but you need to be sure if anything was paid to them and get a balance due (plus interest) asap since the amount owed (if anything) is growing daily. Once the matter of the taxes and penalties on any non distributed required withdrawals is resolved then and only then do you need to look at your tax liabilities.

Second is to decide how to keep your personal tax liabilities as low as possible and that will take looking at your current tax situation. Since you will be taxed at your tax rates it's not a simple question to answer as to how to take the money. (a lump sum, rollover with required distributions, excreta.)You need a good tax adviser who is also a financial adviser to help you with this matter. It will take looking at your current tax rate and income profile in detail to best advise you. Everything from your age and current income to just how you feel about investing (risk taker-conservative-excreta) need to be taken into account.
The most important thing is to settle the tax and penalty questions with the IRS as soon as possible. Remember as the administrator of this estate you also have legal responsibilities in how you handle this matter before the court and you don't want to get into problems with the probate court over how this matter is handled.

Answer 3

If you are the sole heir, you are only liable for the inheritance tax on the value of those accounts. Cash them in, obviously, because they can no longer continue being an IRA or 401K. I'd recommend that you immediately reinvest the money in good income-stocks, so you can make back some of your tax liability right away in dividends. Invest in stocks only. Bonds and mutual funds are just "dead weight." They go nowhere and just get eaten up by inflation, just like cd's in a bank!

Answer 4

The penalty for not taking the required minimum distribution is hefty and the trustees should have notified him of what he had to do. Are you sure he didn't take something?