Losing a loved one is a heart-wrenching experience. Having to deal with the associated practical matters adds anxiety at a time when your energy could be better spent elsewhere. However, if in the course of your loss, you’ve inherited a 401(k), you will want to act quickly and carefully. Here, we offer four tips that will lessen the burden and ensure proper management of your loved one’s assets.
First, know that by law, a person’s spouse is their designated 401(k) beneficiary unless otherwise specified. If pre-deceased by their spouse and no beneficiary is named, a person’s assets will be transferred to their estate and this may imply restrictions on how heirs can manage the money. Accordingly, keeping one’s beneficiaries up-to-date is critical.
Second, surviving spouses will want to know that they have the option of rolling over the inherited 401(k) into their own IRA, allowing the delay of required minimum distributions (RMDs). These mandatory withdrawals come into effect from the moment your spouse would have turned 70.5 years old. If already of this age, these withdrawals are active and will continue to be calculated yearly as a function of the age the deceased would have had. As the surviving spouse, if you are the younger of the two, rolling the 401(k) into your IRA will defer RMDs.
The disadvantage of the above option is that if you are under 59.5 years old, you cannot touch the money rolled over without incurring a 10% early withdrawal penalty. Accordingly, a third consideration is whether it is worth moving the money into an inherited IRA. This option implies no early withdrawal penalty and, as the account will be in your name, permits you to designate beneficiaries of your own. For an inherited IRA, RMDs are calculated upon the basis of the IRS Single Life Expectancy Table.
Lastly, it is important to understand that while leaving the money where it is might be the easiest and least emotionally-taxing approach, it is rarely the smartest and may not even be permitted. Not only will RMDs be calculated based on the original owner’s life expectancy, but the deceased’s employer may require that the money be distributed in a lump sum or by the end of the fifth year following the employee’s death. Awareness of the stipulations on the deceased’s 401(k) plan is crucial.
Managing a loved one’s assets is sad reminder of the loss incurred. Encountering unexpected costs when navigating this process adds insult to injury. Following the four tips provided above will relieve one challenge in this trying time.
Contact Deliberato Law Center
If you find yourself in the position of inheriting a 401K and have questions—or have a 401K or other assets that you would like to pass down to beneficiaries in the most seamless way possible—contact Deliberato Law Center. Our qualified and experienced team of estate planning attorneys will help you determine the best way to structure your estate plan so that your beneficiaries receive assets exactly as you desire. Use the brief form below to contact our team today!