When and how to withdraw money, guidelines to follow to prevent fines, and more If you were the deceased person's spouse, your respective ages at the time of their passing, as well as if you are the beneficiary of a 401(k) plan or have inherited one, will determine how and when you must withdraw the money.
Main points
- You have a few alternatives if your spouse left you a 401(k) or identified you as the beneficiary.
- The age of the spouse who left the plan and your own age will determine your alternatives.
- If the beneficiary of the 401(k) wasn't your spouse, your options are constrained by the beneficiary's age at death.
401(k) Spouse Beneficiary
Let's start by examining the guidelines that must be followed when inheriting a 401(k) plan from your spouse. If you are over 72 and your spouse was over 72, The regulation is that you must continue to withdraw at least the necessary minimum distributions if your spouse was over age 72 (or 70 1/2 if they were 70 1/2 before January 1, 2020) and had begun taking required minimum distributions (RMD) at the time of death. Several things could lead to this: The money can be transferred to your own IRA, often known as a spousal IRA. In this case, you would follow the Uniform Lifetime Table and your age to determine the requisite distributions. You may withdraw more money if you'd like, but not less. With this choice, you would specify your own beneficiaries. This is the best choice for the majority of folks. You can continue to make distributions from the plan's assets while maintaining the statutory minimum distribution schedule that was in place for your spouse. You may withdraw more money if you so wish, but not less. The beneficiary designations that your spouse established are still in effect. You can transfer the money to an inherited IRA, a certain kind of account. You would take needed withdrawals from an inherited IRA according to your single life expectancy table. You may withdraw more money if you would like, but not less. With this choice, you would specify your own beneficiaries. The options above would produce roughly the same necessary distribution if you and your spouse were of similar ages. However, transferring it to your own IRA can provide your future heirs withheirs more possibilities. If You Are Over 59 1/2 Years Old But Under 72 You have a few options if you are the beneficiary of your spouse's 401(k) plan and you are older than 59 1/2 but not yet the necessary minimum payout age: The account can be transferred to your own IRA. You won't be obligated to begin distributions until the calendar year following the year in which you turn 72 (or 70 1/2 if you turned 70 1/2 before January 1, 2020), the RMD age. You can withdraw the money if necessary, but you are not obligated to do so until you reach the RMD age, which gives you more choice. With this choice, your beneficiaries are named. This is the best choice for the majority of folks. The money can stay in the plan. You either keep taking these necessary minimum distributions every year, or you start taking them when your spouse would have achieved their RMD age, if they had begun taking them when they were over 72. The beneficiary designations made by your spouse will remain in effect. You can transfer the money to an "inherited IRA," a particular kind of account. You must take mandatory withdrawals from an inherited IRA using the single life expectancy table. You may withdraw more money if you so wish, but not less. With this choice, your beneficiaries are named. To decide whether you should wait to receive distributions until you reach your RMD age if your spouse is older than you, you must predict your present and future income tax rates. If your spouse had already been obligated to begin taking the annual mandated distributions, you might likewise continue doing so. If you are under the age of 59 1/2, If you inherit a 401(k) plan from a spouse but are under the age of 59 1/2, weigh the advantages and disadvantages of the following options. You are free to keep the funds in your 401(k) plan. With this choice, you can make withdrawals as necessary without having to pay the 10% penalty tax that usually affects those under the age of 59 1/2. Ordinary income tax will still be due on any amount taken. (You would be obliged to continue making required minimum distributions if your spouse was over the RMD age.) At the time of your death, the beneficiary designations made by your spouse would still be in effect. You can transfer the money to an "inherited IRA," a particular kind of account. You must take mandatory withdrawals from an inherited IRA using the single life expectancy table. You may withdraw more money than this, but not less. If you choose this option, even if you are under the age of 59 1/2, withdrawals are not subject to the 10% penalty tax. With this choice, your beneficiaries are named. You can transfer your 401(k) plan assets to an IRA. There are no taxes associated with this transaction. If you are under the age of 59 1/2, you might want to hold off on doing this since, once it becomes your own IRA, any distributions you make will be regarded as early withdrawals and will be subject to both regular income taxes and a 10 percent penalty tax. With this choice, your beneficiaries are named. The first or second of these choices will typically be the best option for those who are under the age of 59 1/2. Non-Spouse 401(k) Beneficiary If you are the 401(k) plan beneficiary of someone who was not your spouse, there are three options available to you. If the inherited person was older than 72, The rule is that you must, at a minimum, continue to take out these required minimum distributions if the person you inherited the account from was over their required minimum distribution age and had already begun taking them at the time of their death. If you would like to, you may take out more than this amount, but not less. According to the IRS mandated minimum distribution life expectancy tables, you can accept these distributions over the course of the decedent's life expectancy or your own, whichever is longer. You ought to be given the choice between doing this and rolling the funds over to an inherited IRA account.If they were under the age of 72
The 401(k) plan will permit one or both of the following alternatives if the individual from whom you inherited the 401(k) plan was not yet age 72 (or 70 1/2 if they were 70 1/2 before January 1, 2020): The 401(k) plan may stipulate that you must withdraw all the funds by December 31 of the fifth year after the person's passing. You could either wait until the last year to take it altogether or take a small amount each year. The amount you remove will be subject to ordinary income taxes, so you might choose to withdraw more in years where you anticipate having a lower tax rate. Depending on your life expectancy and the required minimum distribution life expectancy tables, the plan may let you withdraw the money in annual increments. You might be able to do this by transferring the funds to an inherited IRA account or leaving the money in the plan. Because you can spread the dividends out over a long period of time if you are significantly younger than the person you inherited it from, this option is frequently referred to as a "stretch IRA."Questions and Answers (FAQs)
Do you have to pay taxes on an inherited 401(K)?
You will probably need to pay income taxes if you inherited a 401(k) plan. If you inherit from a non-spouse, you can lower the cost by transferring money into an inherited IRA. If you direct the inheritance from your husband into your own IRA, you won't have to pay taxes on it.What is the inherited 401(k) five-year rule?
The five-year rule requires IRA beneficiaries who inherited before 2019 to take the whole balance by the end of the fifth year following the owner's passing if they are not receiving life expectancy benefits. They may withdraw money before that time, but it's not necessary. If they inherited after 2019, they must follow the 10-year rule.What is the inherited 401(k10-year)'s rule?
This applies to beneficiaries who have inherited an IRA but aren't taking life expectancy payments, much like the five-year rule does. The inheritor would need to withdraw the entire sum by the tenth year following the owner's passing if they passed away after January 1, 2020.