Unsure of what steps you need to take with a recently inherited 401(k) or IRA? It can be a difficult process to navigate, especially since a retirement account is usually inherited after losing someone special.
Step 1: Inform Yourself
When inheriting a retirement account, the first step is to take the time to fully understand what you can and cannot do. Various rules apply depending on your relationship with the deceased--and some are relatively new.
The 2019 SECURE Act limited how long beneficiaries can hold on to inherited accounts. Previously, beneficiaries could take distributions from inherited IRAs and inherited 401(k) plans across their entire lifetime. Now, it’s generally a requirement that the balance in the inherited account be withdrawn fully over ten years.
There are some exceptions, including for spouses of the deceased. Other exemptions include those who are minors, chronically ill or disabled, or who are 10 years (or less) younger than the original owner.
Step 2: Consider Your Options
If you are the spouse, you will have the most leeway:
You can roll the money into your own IRA. Once completed, you would follow the regular required minimum distribution (RMD) rules once you reach age 72. If you are the surviving spouse and do not have an immediate need for cash, this can be a wise choice, as the money could continue to grow in the account.
You can name yourself as the owner of the inherited IRA, deferring distributions until your first RMD.
You can treat yourself as the beneficiary, withdrawing funds within the 10-year timeframe.
There are various tax and RMD implications for each choice, which I am happy to discuss with you in more detail.
If you are a minor child of the deceased:
Annual required minimum distributions must be taken until the minor reaches the age of majority according to the state of residence--usually 18 years old.
The 10-year depletion rule then takes effect, meaning all funds must be withdrawn by the time the beneficiary is 28 years old (if 18 is the age of majority).
Beneficiaries that are chronically ill or disabled can qualify for an exemption from the 10-year depletion rule, which would allow them to take distributions over their entire lifetime.
If you are a non-spousal beneficiary:
Get ready to satisfy the 10-year depletion rule. The bottom line: the inherited funds must be withdrawn fully over the 10-year period.
This process involves opening an inherited IRA and transferring the funds from the inherited Traditional IRA or 401(k) into it. The exact process differs if the account you inherited is a Roth IRA.
Funds can be withdrawn unevenly over different years in this situation--it does not have to be an identical amount over a set schedule.
Of course, there will be tax implications when withdrawing from a traditional IRA or 401(k). These distributions can require some careful planning, depending on your tax bracket and income outlook. Taking distributions from Roth IRAs, on the other hand, will not come with tax implications.
Step 3: Talk Your Options Over With a Qualified Professional
The fact is that we have barely scratched the surface here when it comes to the plethora of options and choices that beneficiaries need to consider. While this gives you a starting point, such decisions are best made in consultation with a financial planner--particularly when grieving the loss of a loved one, family member, or friend.
If you have further questions about financial impacts do not hesitate to email us at office@staltfinancial.com or call 248-733-4344.
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