Article
Options for Inherited Assets From an Employer-Sponsored Retirement Plan
If you recently inherited retirement assets from a deceased
loved one, it is important to pay attention to IRS rules that
govern this type of bequest. Your options in managing this money
typically depend on your relationship to the deceased and whether
he or she had already begun taking required minimum distributions
(RMDs) upon reaching age 73.
Considerations for Spouses
Spouses have three options when it comes to inheriting assets
from a qualified defined contribution retirement plan:
- Keep assets in the plan.
- Take the assets as a lump sum.
- Transfer the assets into their own individual retirement
account (IRA).
As long as your spouse's plan permits, you may keep the assets
in the plan as a "beneficiary account" and continue to enjoy its
tax-deferred status. If your spouse had already begun taking RMDs,
you must continue to take them at least at the same rate. If your
spouse had not yet begun taking RMDs, you can delay taking them
until the year your spouse would have turned age 73.
If you take a lump-sum distribution, you will be required to pay
income taxes on the full amount. Twenty percent of the amount due
to you will be withheld automatically.
If you transfer the assets into an IRA, you are not required to
pay federal estate or income taxes if the assets are left intact
within the estate. After reaching age 73, you must begin taking
RMDs based on your life expectancy. If you have already begun
taking RMDs, you must take your distribution for the year before
transferring the assets into your account.
Considerations for Non-spouses
Non-spouses also have three options:
- Keep assets in the plan.
- Take the assets as a lump sum.
- Roll over the assets into an inherited IRA.
Your option to keep assets in the plan is dependent on plan
guidelines: Some will allow you to keep the account in the plan;
some will require you to withdraw the assets. If the deceased had
already begun taking RMDs, you must continue taking them at the
same rate or faster. If the deceased had not yet begun taking RMDs,
you must begin taking distributions by the end of the year after
the person died.
As with the spousal scenario, taking a lump-sum distribution
will necessitate the payment of income taxes on the full amount.
Twenty percent of the amount due to you will be withheld
automatically.
If you are opening an inherited IRA, the account must be held in
the name of the original participant with you listed as the
beneficiary. You will be taxed on your distributions as you take
them.
Considerations for Trusts
For estate planning reasons, the deceased might have designated a trust, not an
individual, as the beneficiary. Often it is assumed that because
the beneficiary was a trust, the money must be withdrawn
immediately. However, each trust document is different. In certain
situations, you may be able to treat the inherited account as
though you were the named beneficiary. In other situations, you may
have no choice but to close the account immediately. Before you
act, you should have a professional specializing in this area
review the trust document and help you understand your options.
Because determining the tax status of inherited retirement
assets can be complicated, you may want to consult an estate
planning attorney, a tax professional, or a financial professional
to answer any questions you may have.
