When it comes to inheritance, it often happens that there are mixed feelings. On the one hand, there is the excitement of getting stuff, but on the other hand there is also the burden of figuring out how to handle the assets properly and manage them wisely. Occasionally, inheritance can occasionally be a burden. But it need not be so.
When it comes to inheriting retirement accounts, there are certain things of which it is helpful to beware, certain pitfalls to avoid. To begin with, it is important to have an understanding of the rules that govern IRAs, and it is smart not to do anything with the account until those rules make sense. Those who have questions about how IRAs work should work with professionals who do understand them and frequently work with them.
One thing to keep in mind is that spouses have more options as to how to manage IRA assets. Spouses who inherit IRA have the option to role the inherited assets into his or her own IRA and postpone distributions from a traditional IRA until the age of 70 ½. An early withdrawal penalty may apply, though. Non-spouses don’t have this option. In general, non-spousal IRA heirs are required to take out a minimum amount on an annual basis, before the end of the year after the IRA owner dies.
Distribution is another area that can be tricky. The first thing is that if the IRA owner was over 70 ½ at the time of death, the beneficiaries need to mandatory distribution for the year of death is taken out. For non-spouse beneficiaries, there are other unique rules regarding distribution that we won’t get into here. Just be aware that they are they.
For traditional IRAs, there is income tax on these payouts, but not for Roth IRAs. The important thing as far as distributions is to check the terms of the IRA, since those terms are what govern. One distribution option with these distributions is to take minimum distributions over one’s expected life span. Such a decision will not work for all beneficiaries, though.
A final thing to be aware of is that employers may handle things differently, so it is important for each individual to understand the rules that apply to their plan.
Source: Los Angeles times, “Non-spouse inherits 401(k); What rules apply?,” Lis Weston, July 19, 2013.