QUESTION:

I have a 401(k) plan that's worth about $50,000. Will my beneficiaries be taxed or penalized for withdrawing this money when it goes to them after my death? Can they roll it over into another tax deferred plan?

ANSWER:

Assets in a 401(k) plan are taxed whenever the money comes out of the plan. If you take it out during your lifetime, you will pay income tax on the amount you withdraw each year. If there is money left when you die, your beneficiaries must pay income tax on it as it comes out of the plan.

Only a spouse can roll over your retirement plan into another retirement plan of his or her own when you die. Other beneficiaries are required to start taking distributions in the year after your death. As long as your beneficiaries withdraw the minimum required amount -- a sum that is computed according to a prescribed formula -- there will be no penalties, just income tax.