Wednesday, June 13, 2012

Inheritance of 401(k)'s and How to Avoid Penalties

Here's a useful Q & A where a tax professional answers a question regarding tax penalties on an inherited 401(k). A sister had inherited her brother's 401(k) and did not realize she was required to take required minimum distributions (RMDs) beginning in the year of the transfer. In her case she went two years without recognizing the issue. She was hoping that she could remedy the situation by increasing the amount of RMDs going forward to make sure she had taken the full amount left in the account after five years. Unfortunately that won't allow her to avoid the penalties. The only possible solution is to write a letter to the IRS explaining the reason for the mistake. It's not uncommon for them to not assess penalties by reason of not knowing about the need to take the distributions.

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