What to do with a inherited 401k?
Inherited 401k: Here is good news wrapped in a bad: In the midst of the pain of the loss of a loved one, he learns that he has been named beneficiary of the 401k plan of the deceased. Surely you will have too many things in your head to make quick decisions about what to do with the money. But do not let yourself be.
The IRS applies strict rules, deadlines and penalties with respect to inherited 401k retirement accounts, which vary according to the type of account in question. This column deals with the inheritance of 401 (k) plans and other similar plans provided by the employer. According to federal law, surviving spouses automatically inherit 401 (k) plans from their spouses unless another person has been named as a beneficiary and the surviving spouse has waived the plan in writing. If the deceased was single at the time of death, the funds in your plan pass to the designated beneficiary. The IRS applies basic rules regarding the taxes, distribution and terms of the 401 k plans.
What to do if you inherit a 401k plan?
However, the plans have the option of setting more restrictive guidelines, so it is recommended to read carefully the documents of the plan in question. Basically: You must pay the income tax on the distributions (except for the Roth accounts, which have already been taxed), although you could extend the withdrawals and the payment of the taxes over a number of years, depending on how structure Many 401 k plans require beneficiaries to withdraw money either in full or in different payments for up to five years after the death of the person; however, others allow you to keep the money in the plan indefinitely. That’s why it’s convenient to check your rules.
You should know that the distributions will be added to your taxable income for the year, which can significantly increase your taxes. Therefore, many people prefer to extend payments as much as possible. In addition, the longer the funds remain in the account, the more income will accrue, free of taxes. If the original account holder had already reached the maximum age for retirement, which is 70 and a half years, you could continue withdrawing funds according to the holder’s withdrawal schedule.
The minimum amount you can withdraw per month will depend on your own life expectancy, according to the IRS tables (see Appendix C of IRS Publication 590 at www.irs.gov). Alternatively, you could expedite the payment schedule or withdraw everything together. You could also transfer your balance to an “Inherited IRA” account, which must be an account different from your other IRA accounts. With an inherited IRA, you must withdraw a certain amount per year, based on your life expectancy.
Distributions must begin the year after the donor’s death, regardless of whether or not you are retired. Make sure the 401 (k) trustee transfers the funds directly to the trustee of the inherited 401k so you never touch the money; otherwise, the transfer could be canceled and you would have to pay taxes for the entire amount that year. In summary: Talk to a financial or legal expert before taking a step regarding your inheritance.