If You’ve Inherited a Retirement Account, You Should Do This

Essential takeaways in this article:

• Get professional guidance. Inherited accounts have specific IRS rules and deadlines.
• Spousal and non-spousal beneficiaries. Spouses can roll assets into their own IRA with tax-deferred growth, non-spouses, including children, must withdraw funds within 10 years.
• Lump-Sum option. Available to all, but fully taxable.
• Plan carefully. Dechtman Wealth Management can help you maximize the account’s benefits and plan for future beneficiaries.

It’s challenging to think about finances while grieving the loss of a loved one. However, if you’ve inherited a retirement account from a parent or another loved one, it’s wise to consult a tax professional immediately. Strict IRS rules, deadlines, and penalties may apply.

Spousal Inheritance

The IRS allows a spousal rollover if you’re a surviving spouse inheriting a retirement account. This enables you to transfer your deceased spouse’s 401(k) or IRA into your own IRA, where the funds can grow tax deferred.

If your spouse was 73 or older, their annual required minimum distribution (RMD) must be withdrawn before rolling the assets into your account. Afterward, the inherited retirement account is treated as your own, with any early withdrawal penalties or required minimum distributions (RMDs) based on age.

Remember: Roth IRAs and 401(k)s are exempt from RMDs.

Non-Spouse Inheritance:

If you inherit a retirement account from someone other than a spouse, IRS rules require you to transfer the assets into an inherited individual retirement account (IRA).

You can withdraw immediately without an early withdrawal penalty, but each withdrawal is subject to income tax. Inherited retirement account distribution rules require keeping this inherited IRA separate from any personal retirement accounts you may own, with different distribution requirements applying to inherited accounts than to your accounts.

Lump-Sum Option:

Whether you are a spouse or other beneficiary of an inherited retirement account, you can take a lump-sum distribution without an early withdrawal penalty.

However, the entire amount will be subject to income tax. Inherited retirement account distribution rules vary significantly between inherited IRAs and 401(ks), so consulting an advisor is essential.

Tip: If you inherit a Roth IRA, earnings are typically tax-free if you have met the five-year holding period.

Distribution Options for Non-Spouse Beneficiaries:

Under inherited retirement account rules, a non-spouse beneficiary of an inherited retirement account may be required to withdraw the entire balance within 10 years following updates to the SECURE Act.

If the original account holder passed away in 2020 or later, most beneficiaries now fall under this 10-year rule. However, eligible designated beneficiaries, such as minors, the chronically ill, or beneficiaries close in age to the deceased, may qualify for “stretch” provisions.

Stretch provisions allow withdrawals based on life expectancy. It is best to consult a professional to determine which options apply to your inherited retirement account.

Making the most of your Inherited Retirement Account: you’re not alone.

There’s much more to consider when inheriting a retirement account, especially given the different inherited retirement account rules for IRAs and 401(k)s.

At Dechtman Wealth Management, we work closely with clients, their attorneys, and accountants to help beneficiaries of inherited retirement accounts make the most of the assets. We ensure that their own estate plans properly address retirement accounts for future beneficiaries. 

Would you like to learn more? Please, call Jordan Dechtman, your Denver wealth manager at 303-741-9772 or email him at Jordan@JordanDetchtman.com or use our website to schedule an appointment.

Don’t work alone during this challenging time; work with Dechtman Wealth.