Article
Considerations for Inherited Retirement Assets
Your options in managing assets that you inherit from a loved
one's qualified retirement plan may depend on the type of
retirement plan in question -- for example, 401(k)/403(b) plan or
IRA -- and your relationship to the deceased.
Employer-Sponsored Retirement Plans
Federal laws require that a spouse be the primary beneficiary
unless he or she waives that right in writing. When retirement plan
assets are left intact within an estate, spousal beneficiaries may
inherit the money without paying federal estate or income taxes.
After age 73, the surviving spouse must begin required minimum
distributions (RMDs) based on his or her life expectancy. The
RMDs are taxed as ordinary income.
With nonspousal beneficiaries, the plan's rules may determine
the beneficiary's options. Some plans require nonspousal
beneficiaries to cash out retirement plan bequests between one and
five years after the account owner's death. In contrast, other
employer plans may offer nonspousal beneficiaries the option of
completing a trustee-to-trustee transfer from an employer-sponsored
plan to an IRA established for this purpose and subsequently taking
annual distributions based on the beneficiary's life expectancy.
Regardless of the method that you follow, distributions taken by
heirs are taxed as ordinary income.
To help avoid potentially unnecessary tax payments,
beneficiaries will need to determine the rules of the deceased's
retirement plan and make sure that a bequest from an
employer-sponsored retirement plan is managed properly. You may
want to consult a financial professional to assist with these
steps.
IRAs
With an IRA, spousal beneficiaries may designate themselves as
the account owner and treat an inherited IRA as their own. This
means a surviving spouse can transfer the assets to an existing IRA
or to an employer-sponsored plan. These transfers typically do not
trigger tax payments as long as a spouse follows the rules for
trustee-to-trustee transfers. After age 73, a spousal beneficiary
is mandated to take annual RMDs, which are based on the surviving
spouse's life expectancy and are taxed as ordinary income.
Nonspousal beneficiaries cannot transfer assets within an
inherited IRA to an existing IRA. Instead, they have two options:
They may take all distributions within five years of the original
account owner's death or take annual distributions determined by
the life expectancy of either the beneficiary or the decedent,
whichever is longer.
Because determining the tax status of inherited assets can be
complicated, you may want to consult an estate-planning attorney or
a financial professional to answer any questions you may have.