Welcome to Money As If, a personal finance newsletter for anyone who's ever attended a specific sporting event to get a free bobblehead only to have supplies run out once they reached the front of the line.

Today’s roster:

• Examining a nuance of the Great Wealth Transfer

• Ballpark figures

• Bar Origin

— Jeanine

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IN THESE, OUR (POSSIBLE) END TIMES

What happens if I inherit a 401(k)?

OK, so our lead story this week gets a little in the weeds, but it felt worth the trip, given we're at the beginning of The Great Wealth Transfer, and my family's surely not the only one encountering this issue.

Some background

A few months ago, my parent got on a plane together. Weird phrasing, I know, but nowadays, when they do that specifically, they give me a refresher on their estate plan.

We’ve been through the basics before — here is the will, here are our people — but this was the first time my dad really drilled home that most of their assets were in 401(k) accounts of which I, upon their death, would become the sole beneficiary, tasked with giving my brother his half of our inheritance.

That struck me as complicated, particularly for tax purposes, so I did a little digging, and, yup, it sure is, though certainly not unmanageable. Let’s start with what you should know if you find yourself on either side of this situation.

That inheritance is (probably) taxable

Because, chances are, your loved one has yet to pay the IRS for those earnings. There are, however, exceptions. Per Gene Bott, Certified Public Accountant (CPA), tax advisor, and vice president at Tax Hive, these are the big ones:

• The money is in a ROTH 401(k), and non-taxable status has been achieved, which generally means account contributions were made over five years before the withdrawal date.

• The money is going to a spouse in which case said spouse can potentially avoid taxes by rolling those funds into their own retirement account.

• The 401(k) includes money that’s considered part of a life insurance policy’s death benefit.

• Other beneficiaries must pay taxes on their distributions.

Keep in mind that you won't pay taxes on the money until you take it out of the account, but that brings us to the next point.

Most beneficiaries have to make withdrawals

And the minimum requirements "are enormously, stupidly … complex now," says Ryan Frailich, Certified Financial Planner (CFP) and founder of Deliberate Finances. They vary based on the recipient's relationship to the deceased, the age of the deceased, and whether the deceased was already taking their required minimum distributions.

They also depend on when the accountholder died, given that the rules changed in 2020 following the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.

However, “beneficiaries usually fall under what’s called the 10-year rule, meaning they have to withdraw all the funds within 10 years of the original accountholder’s death,” says Padideh Jafari, a licensed estate planning and family law attorney and founder of Jafari Law & Mediation Office.

If you don’t withdraw the money within that timeframe, you face a steep tax penalty (25%, though you can get it reduced to 10% if corrected within two years). Spouses, minor children, and chronically ill or disabled beneficiaries are eligible for longer (and often age-based) windows.

All beneficiaries should be … beneficiaries

Otherwise, the sole beneficiary can stiff the other intended recipients. “That beneficiary form overrides your will,” says Angelo Crocco, owner of AC Accounting, meaning whoever is listed on it has no legal responsibility to divvy up the funds.

On the flip side, honoring a loved one's request could leave the solo beneficiary shortchanged because, as far as the IRS is concerned, that person — and only that person — is responsible for the associated tax bill. Managing that liability is trickier than it seems.

“Every dollar that comes out [of an inherited 401(k) account] is treated like you’re earning income,” says Justin Nabity, CFP, chartered financial consultant (CHFC), and founder of Physicians Thrive.

So, say you’re single and have $150,000 in W-2 earnings and withdraw $70,000 to split with a loved one in a given year. The IRS now considers your taxable income $220,000, bumping you from the 24% to 32% tax bracket and requiring you — but not, say, your younger brother — to pay more to good old Uncle Sam.

You could run into gift-tax considerations

The lifetime estate tax exemption is $13.99 million in 2025, but it's projected to drop to $7 million in 2026, and could sunset entirely if Congress doesn’t pass new legislation. For now, couples can gift double each amount to their heirs over the next few years, so only very wealthy households need to worry about this particular tax implication.

But say you've only designated one beneficiary and expect that person to withdraw and share funds with another family member. That beneficiary can run afoul of the annual gift tax limit, currently $19,000 for single taxpayers and $38,000 for married couples.

Give a gift over that amount in any given tax year, and you must report the whole shebang as taxable income, which the IRS deducts from your lifetime exemption.

Avoiding a big mess

If all of these intricacies have your head spinning, well, I hear you. Fortunately, there are steps you can take to preclude serious issues, streamline the process, and make the most of an inheritance. (My parents have done a few of these recently, just in case you were wondering. You’re welcome, little bro!)

For the bequeathers

• Name all intended beneficiaries with details. "All loved ones intended to be recipients [of] a retirement account should be listed as beneficiaries with specific percentages assigned to each beneficiary in accordance to the original account owner's preferences," says Reem Khatib, partner at Tax Law Advocates.

• Have a contingency plan. "Include those you want inheriting the money should something happen to the first beneficiaries," Bott says. "You should also make sure your will and estate documents match what is on your retirement account beneficiary lists."

• Leverage the annual gift tax exclusion if you have a large estate, suggests Nabity. That's a common tactic wealthy families use to reduce or avoid the estate tax.

• Consolidate. Employer-sponsored plans, in particular, are often subject to different rules and timelines. Some even require immediate withdrawals upon an accountholder’s death, so it can help to do some housekeeping. "All inactive workplace plans should be consolidated," says Jennifer P. Kirby, Certified Investment Management Analyst (CIMA) and managing partner at Talisman Wealth Advisors.

• Convert. "If your goal is to leave a tax-efficient legacy, consider other vehicles like life insurance or a Roth conversion," says Fradel Barber, founder and CEO of The World Changers.

For the bequeathed

• Get the details, including account types, applicable federal laws, and subsequent withdrawal options. Understand if you face state-specific tax implications, too. “Some states have different treatment of inherited retirement accounts," says Raoul P.E. Schweicher, CPA and managing partner at MSadvisory.

• Plan withdrawals. You can take a lump sum distribution, but doing so usually triggers a hefty bill. You're often better off spreading withdrawals over that allotted 10-year period (while meeting whatever minimums are required.) “If your income varies year to year, plan withdrawals for lower-income years to save on taxes," Barber suggests.

• Rollover assets into an inherited 401(k). That move won’t spare non-spouses from the 10-year rule. However, it “typically offers more investment options and flexibility,” Schweicher says.

• Build your nest. “Just because you have to take it out doesn't mean you have to spend the proceeds,” says Kirby. “Pay the tax and turn right around and save the net unless you really need it.”

And honestly? All parties should talk to each other — and an estate planning attorney or financial advisor at various points in this process.

I’m usually not a fan of that as blanket advice because it feels like passing the buck (and creating an expense), but there’s a ton of nuance, legal intricacies, and tax avoidance strategies here that you can likely only master with a little help and lot of communication.

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CHEAT SHEET

FRESH GREEN

Nowadays, most financial takes are boilerplate. These aren't.

• Service-y: Investopedia has steps you can take to avoid defaulting on your student loans as the Trump administration resumes federal collection efforts.

• Speaking of student loan debt, shout out to the anonymous survey participant who told The Cut that their most frivolous purchase was their education: “I have a degree that I’ve never made any money from.”

• This one is for anyone who's ever questioned the utility of Bravo's flagship franchise (which, for the record, is not me): Lessons on regaining financial independence post-divorce, courtesy of the Real Housewives.

THIRST TRAP

And, finally, today, in things I would buy if, you know, I could just buy things …

Blast off

Jonathan Adler’s rocket decanters. Each one costs between $175 to $250, and the full set (which also includes Absinthe and Rum) retails for $1,740.

Not cheap, per se, but still around 8620% more affordable than the deposit (the deposit!) required to spend 11 minutes in space.

Got questions, comments, receipts, tips, thirst traps, etc. you’d like to share? Send them to [email protected].

_{This article is for educational purposes only. We don’t recommend or advise individuals to buy, not buy, sell, or not sell particular investments or other assets, as everyone’s circumstances are different. Also, it’s your money and ultimately up to you to decide the best use for it.}