Inheriting a retirement account can be both a financial windfall and a source of confusion. Whether you’re the spouse, child, or another beneficiary, it’s important to understand the rules and responsibilities that come with this inheritance. Here’s what you need to know to make the most of the assets and avoid costly mistakes.
Types of Retirement Accounts You Might Inherit
When you inherit a retirement account, the type of account will determine the steps you need to take. Common examples include:
- Traditional IRA: Withdrawals are generally taxed as income.
- Roth IRA: Withdrawals are typically tax-free, but rules differ for beneficiaries.
- 401(k): Rules vary depending on the plan’s policies and your relationship to the deceased.
Knowing the specific type of account will help you understand your obligations.
Key Considerations for Beneficiaries
- Understand the SECURE Act Rules. The SECURE Act of 2019 introduced significant changes to inherited retirement accounts. Most non-spouse beneficiaries are now required to withdraw all funds within 10 years. However, exceptions apply to spouses, minor children, and certain other eligible beneficiaries who may qualify for extended distribution periods.
- Plan for Taxes. Withdrawals from traditional retirement accounts are subject to income tax. For Roth accounts, taxes are generally avoided if the account was held for at least five years. Planning your withdrawals carefully can minimize your tax burden.
- Avoid Early Withdrawal Penalties. Beneficiaries are generally exempt from the 10% early withdrawal penalty, but it’s essential to follow the distribution rules to avoid unnecessary penalties.
- Consider a Spousal Rollover. If you are the spouse of the deceased, you have the unique option to roll the inherited account into your own retirement account. This allows you to continue growing the funds tax-deferred and offers more flexibility.
- Know Your Distribution Options. Beneficiaries typically have several options, including:
- Taking a lump-sum distribution (which may lead to a large tax bill)
- Taking distributions over the 10-year period
- Establishing an inherited IRA to manage distributions more effectively
- Review Plan-Specific Rules
Not all retirement plans follow the same guidelines. Employer-sponsored plans, such as 401(k)s, may have unique rules, so it’s important to review the plan’s terms.
Inheriting a retirement account can be challenging, as it involves managing financial decisions and tax obligations. Making the wrong decision can lead to significant tax liabilities or missed opportunities for growth.
If you’ve inherited a retirement account and aren’t sure what to do next, contact our experienced attorneys at Grissom Law, LLC. Our knowledgeable attorneys will walk you through the process, helping you make well-informed decisions while safeguarding your financial future.
Disclaimer
This Blog/Web Site is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide legal advice. By using this blog site you understand that there is no attorney client relationship between you and Grissom Law, LLC.