What to Do When You Inherit a 401(k)

If you inherited a 401(k), the first thing I want to say is I’m sorry for your loss. I know that it can be difficult to go through and the last thing you want to do is organize the estate and get the finances in order. However, it is important to understand your options and take the right steps to avoid unnecessary taxes and penalties.

The rules for inheriting a 401(k) depend largely on your relationship to the original account owner and the type of 401(k) they had. Here are some general guidelines based on the information I found from the web:

Spouse Beneficiary

This is the easiest case, as you have more options than other heirs. If your spouse passed away and left you with their 401(k), you can:

• Roll over the inherited assets into your own retirement account, such as a 401(k) or IRA. This way, you can continue contributing to the account and take required minimum distributions (RMDs) based on your own life expectancy .
• Transfer the funds into an inherited IRA, which is a special type of IRA for beneficiaries. You can take RMDs based on your own life expectancy or the original account owner’s life expectancy, depending on when they died .
• Take a lump-sum distribution of the account balance, but you will have to pay income taxes on it . This option may not be advisable unless you need the money urgently or have a low tax rate.
• Disclaim the account and pass it to an alternate beneficiary, such as a child or a charity . This option may be suitable if you don’t need the money or want to reduce your taxable estate.

Non-Spouse Beneficiary

This is a more complicated case, as you have fewer options and more restrictions. You cannot roll over the inherited assets into your own retirement account. You can only:

• Disclaim the account and pass it to an alternate beneficiary. This option may be suitable if you don’t need the money or want to reduce your taxable estate.
• Empty the account by the end of the 10th year after the year of the account owner’s death. You can take withdrawals at any time during this period, but you will have to pay income taxes on them . This option may be suitable if you want to spread out the tax burden over several years or invest the money elsewhere.

The rules may vary depending on the plan’s rules, the type of 401(k) (traditional or Roth), and the age of the account owner at the time of their death. You may want to consult a financial or tax advisor to review what makes sense for your situation. I hope this helps. 😊