'Our Sister Left Us Her $281,000 401(k)' — We Want To Share It Fairly With The Rest Of the Family, Suze Orman Weighs In

When a loved one passes away, navigating their financial legacy can be both emotional and complicated. That's exactly the situation one listener named Irene faced when she wrote to personal finance expert Suze Orman on the "Women & Money" podcast.

Irene's 60-year-old sister had passed away, leaving behind a $281,000 traditional 401(k). Irene, 62, and her 64-year-old sister were listed as the beneficiaries. However, they also have two other siblings, ages 59 and 64, and want to share the inheritance with them as well. 

The big question: what's the best way to do that — especially considering the tax implications?

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Inheriting a Traditional 401(k)

Orman explained that since the account is a traditional 401(k) and not a Roth, taxes have never been paid on that money. That means the beneficiaries will owe ordinary income tax on any withdrawals they make.

The account will need to be transferred into what's known as an inherited IRA for each listed beneficiary. Under current IRS rules, non-spouse beneficiaries like Irene and her sister must fully withdraw the funds within 10 years of the original account holder's death. If they wait too long and withdraw it all at once at the end of 10 years, they could be hit with a much larger tax bill.

Spreading Withdrawals Over Time

Orman recommends spreading the withdrawals over the 10-year period to manage taxes more efficiently. If the account is split evenly between Irene and her sister, each would receive about $140,500. Orman suggests each sister takes out roughly $14,000 to $20,000 per year, depending on each person's income tax situation.

"So at the end of the 10th year, it’s wiped clean," Orman said. "When you take out the money, you are going to owe ordinary income tax on it."

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Gifting a Portion to Other Siblings

So, how can Irene and her sister share the inheritance with their two other siblings who weren't listed as beneficiaries?

Orman said they can choose to gift money to their siblings from their withdrawals — after paying the taxes themselves. "You would subtract whatever amount of income tax you paid, figure out how much that would have been on the amount you want to give them, and then just give them the money. It’s just that easy," Orman explained.

That means if Irene withdraws $15,000 and pays, for example, $3,000 in taxes, she could give one of her siblings up to $12,000 from that amount. There's no need to go through the inherited IRA directly, and the siblings receiving the gift won't owe taxes on it if it's under the annual gift tax exclusion, which is $19,000 in 2025.

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Planning Ahead Can Make Things Easier

While this plan allows Irene and her sister to honor their family's wishes, Orman used the moment to make a broader point: estate planning matters. She noted that if the sister had used a Roth 401(k) or Roth IRA, it could have simplified things by eliminating the tax burden altogether.

Still, with some smart planning and open communication, Irene and her siblings can share the inheritance in a fair and tax-efficient way.

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