When it comes to beneficiaries of a 401(k) plan or inherited accounts, your options for how and when you must withdraw funds will depend on two factors: whether you are the spouse of the deceased person, and how old you both were at the time of death.
Spousal Beneficiary of a 401(k)
First, let’s take a look at the rules that apply when receiving an inherited 401(k) plan from a spouse.
If your spouse was over 72 years old, and you are also over 72 years old
If your spouse was over 72 years old (or 70 and a half if they reached 70 and a half before January 1, 2020) and had already begun taking required minimum distributions (RMDs) at the time of death, and you are also at least at the required minimum distribution age, the rule states that you must continue to take the required minimum distribution at least. This can happen in several ways:
- You can transfer the funds to your IRA account, known as a spousal IRA. With this option, you will take the required distributions based on your age and the uniform life table. If you wish, you can withdraw a larger amount than this, but not less. You will name your own beneficiaries with this option. For most people, this is the best option.
- You can leave the funds in the plan, and continue to withdraw according to the minimum required distribution schedule that applies to your spouse. If you choose this, you can withdraw more than this amount, but not less. The beneficiary designations set up by your spouse remain in effect.
- You can transfer the funds to a specific type of account called an inherited IRA. With an inherited IRA, you will take the required distributions based on your individual life expectancy table. If you wish, you can withdraw a larger amount than this, but not less. You will name your own beneficiaries with this option.
If you and your spouse are the same age, the options mentioned above will result in the same required minimum distribution. However, transferring it to your IRA may provide additional options for beneficiaries in the future.
If you are over 59 and a half but under 72 years old
If you are the beneficiary of your spouse’s 401(k) plan and you are over 59 and a half but have not yet reached the required minimum distribution age, you have several options:
- You can transfer the account to your IRA. The potential benefit of this is that you won’t be required to start withdrawing until the year after you reach your required minimum distribution age of 72 (or 70 and a half if you reached 70 and a half before January 1, 2020). This option provides additional flexibility as you can withdraw funds if you need to, but you won’t be required to withdraw until you reach your required minimum distribution age. You will name your own beneficiaries with this option. For most people, this is the best option.
- You can leave the funds in the plan. If your spouse was over 72 and had started taking the required minimum distributions, you will continue to take those required minimum distributions each year; or you will start taking them when your spouse reaches their required minimum distribution age. The beneficiary designations set up by your spouse remain in effect with this option.
- You can transfer the funds to a specific type of account called an inherited IRA. With an inherited IRA, you will take the required distributions based on your individual life expectancy table. If you wish, you can withdraw a larger amount than this, but not less. You will name your own beneficiaries with this option.
If
Your spouse was older than you, so you should estimate the current and future income tax rates to determine whether you should delay withdrawals until you reach the required minimum distribution age. You can also continue the required annual withdrawals if your spouse had already begun them.
If you are under age 59 and a half
If you inherit your spouse’s 401(k) plan but have not yet reached age 59 and a half, consider the pros and cons of the following options:
- You can leave the money in the 401(k) plan. With this option, you can withdraw money as needed and not pay the 10% penalty tax that usually applies to people under 59 and a half. You will pay regular income tax on any amount withdrawn. (If your spouse had already reached the required minimum distribution age, you will need to continue with the required minimum distributions.) The beneficiary designations set up by your spouse will remain in effect after your death.
- You can convert the money to a specific type of account called an inherited IRA. With an inherited IRA, you will take required distributions based on your own life expectancy table. You can withdraw more than this amount, but not less. With this option, withdrawals are not subject to the 10% penalty tax even if you have not reached age 59 and a half. You will name your own beneficiaries with this option.
- You can convert the 401(k) plan to your own IRA account. There would be no taxes on this transaction. However, if you have not yet reached age 59 and a half, you may not want to do this because once it becomes your IRA, any withdrawals you make would be considered early withdrawals and be subject to the 10% penalty tax along with regular income taxes. You will name your own beneficiaries with this option.
For most people who are under age 59 and a half, the first or second option will likely be the best choice.
Non-Spouse Beneficiary of 401(k)
If you are the beneficiary of someone else’s 401(k) plan but they were not your spouse, there are three possible options.
If the person you inherited from was over age 72
If the person you inherited the account from was older than the required minimum distribution age and had already started taking the required minimum distributions at the time of death, the rule says that you must, at a minimum, continue taking these required minimum distributions, and if you wish, you can take out more than this amount, but not less.
You can withdraw these distributions over the deceased’s life expectancy or your own life expectancy, whichever is longer, according to the required minimum distribution tables published by the Internal Revenue Service (IRS). You should have the option to do this by leaving the money in the plan or converting it to an inherited IRA account.
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