My dad only had IRAs and CDs, he had a good pension so no 401k. I cashed own out several years ago and to a big hit in terms of taxes. I think the big problem with taxes on a 401k is that the employees contribution is pre-tax money. The money is deducted and put into your 401k and then you federal and local income taxes, in any are calculated after the contribution is deduct so taxes have never been paid on that income. If you have a 401k for 20 or 30 years it should work out o.k. your earning money on more money and don’t pay taxes until you begin to take distribution. If you cash out your 401k in a lump sum you take a pretty good tax hit as opposed to paying taxes on smaller amounts during your retirement. If he took a lump sum payment last year that can result in a bigger tax hit.
But I don’t know how 401Ks work when someone dies. If he died in March 2010 you need to do his personal taxes for 1/1/10 through the date of his death and a separate then taxes for the estate from the date of his death through 12/12/10. Is that what you’re doing? Of course, I’m sure you are. If you’re doing his personal taxes then he, essentially is paying his taxes on the $4000 dollars, not you. You have to pay whatever he would have paid but, only in relation to his income before he died it gets complicated when people die in the middle of the year, which they almost always do. You’ll probably get a refund if you haven’t figured that out yet.