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no 10% penalty - beneficiary of decedent's 401(k)

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    no 10% penalty - beneficiary of decedent's 401(k)

    I'm once again bogged down in the myriad rules and exceptions of IRA vs. 401(k), so looking for confirmation here.

    Facts: taxpayer and spouse both under age 59.5. Taxpayer with both IRA and 401(k) dies, spouse is sole beneficiary of both. From which account, if any, can spouse take out money without 10% early withdrawal (excise) penalty?

    Under ยง72(t)(2)(A)(ii) it states 10% early distribution penalty does not apply to distributions which are made to a beneficiary (or to the estate of the employee) on or after the death of the employee.

    It further says this applies to plans as defined in section 4974(c), which lists among other definitions, a plan described in section 401(a) which includes a trust exempt from tax under section 501(a). So now we trot over to 401(a) and find a description for a trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section.

    Notice that nowhere do they use the terms "Individual Retirement Account/Arrangement" or "401(k)".

    Am I correct that there is no penalty for 401(k) withdrawals at any time, given my facts? Am I also correct that this rule does NOT apply in a blanket fashion to IRAs? I know spouse can elect to treat inherited IRA as her own, in which case I assume normal rules apply. Or, spouse could not make that election, and then treat it as a separate inherited IRA with its own rules as to timing of distributions.
    "You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard

    #2
    Doesn't section 4974(c)(4) address IRAs?

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      #3
      Originally posted by New York Enrolled Agent View Post
      Doesn't section 4974(c)(4) address IRAs?
      Now that I look there, yes it does. Thank you, that was the kick I needed to think it thru again. Now I remember that you can drain the entire balance of an inherited IRA without the 10% penalty, just like a 401(k). IT will be code 4 on the 1099-R.
      "You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard

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        #4
        Originally posted by Rapid Robert View Post
        Now that I look there, yes it does. .
        I missed my opportunity to add a small rant here -- what made my original analysis difficult is that sometimes IRAs are treated just like "employer" plans (e.g. 401k) and sometimes not, and the differences don't seem to make a lot sense.

        It's one thing to have complexity in the tax code to close the loopholes that folks are always trying to crawl through, but this is needless complexity that doesn't seem to close any particular loopholes.
        "You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard

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