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401(k) documents

A 401(k) is a tax-deferred, retirement savings account. When a person opens a 401(k), he or she names one or more beneficiaries to receive the remaining funds when the account holder dies. If you have inherited a 401(k), your options will depend on several factors, including your age, the account holder’s age at the time of death, and whether the account holder was your spouse. One thing is certain: It is crucial to handle your inheritance carefully to minimize your tax liability. Our experienced agent can help.

Surviving Spouse of the Deceased

If the deceased account holder was your spouse, you will have more options than a non-spouse beneficiary. You can:

  • Roll the money over into your own 401(k) – if your plan allows it
  • Transfer the funds to your own IRA
  • Remain a named beneficiary

What If You Are Under the Age of 59 ½?

Beneficiaries under the age of 59 ½ pay income tax on withdrawals, but they are not required to pay the 10% early withdrawal penalty. If you are not yet 59 ½ and have inherited a 401(k) from your spouse, your options are to:

  • Leave the funds in the 401(k) plan and take withdrawals as needed without paying the early withdrawal penalties: Beneficiaries remain as named by your spouse. Note — If your spouse had reached the required minimum distribution age (72) before death, you will have to continue with the required minimum distributions and pay income tax on those withdrawals.
  • Roll the money over into an Inherited IRA: With this type of account, you are required to take minimum distributions based on your life expectancy. Withdrawals are not subject to the 10% early withdrawal penalty, even if you are under the age of 59 ½. You may name your own beneficiaries with an Inherited IRA.
  • Roll the funds over into your own IRA: The transaction is not taxed, and you name your beneficiaries. However, any distributions you take from your own IRA before the age of 59 ½ are subject to the 10% early withdrawal penalty, in addition to income tax.

Non-Spouse Beneficiary

If you inherited a 401(k) from a person other than your spouse, your options would depend on the age of the deceased at the time of death:

  • If that person was over the age of 72, the required minimum distribution age, you must continue to take out no less than the minimum distributions, over the life expectancy of the deceased person or your own, whichever is longer. You are allowed to take out more, but not less. The funds can either be left in the 401(k) plan or rolled over into an Inherited IRA.
  • If the deceased had not reached age 72 at the time of death (or 70 ½ if that age was reached before January 1, 2020), the plan may require either of the following: 1) You may be required to take all of the money out of the plan by December 31 of the fifth year following the account holder’s death; or 2) you may be allowed to withdraw annual amounts over your life expectancy, enabling you to stretch the distributions over an extended period of time. Distributions are subject to income tax.