Happens When You Inherit a 401(k)
Starting in 2007, if you inherit a
401(k) or other qualified plan from someone other than
your spouse, you may be able to transfer the balance
directly into a traditional Individual Retirement
Account (IRA). This new rule gives you valuable
opportunity to stretch the distribution (and tax) over
your lifetime, while the investments continue to grow
Previously, only spouses could
roll over an inherited company plan to an IRA.
Everyone else usually ended up taking distributions in a
lump sum or over a few years and paying substantial
federal and state taxes as a result.
To get the full benefit, it is
important for children, grandchildren and other named
beneficiaries to follow the rules strictly. That
means you must transfer the money directly into a
properly titled inherited IRA that's maintained in the
name of the deceased (for example, Robert Jones IRA
(deceased Mar 1, 2007) for the benefit of Joseph
Trying to roll the inherited money
into your own IRA or cashing a distribution check made
out to you could mean big trouble because you'd owe
taxes on the entire amount. So it is real
important to be real careful when going down this path.
A company is not required to automatically transfer the
money to an inherited IRA. If it insists on
issuing a check, make sure that the check is made out
directly to the inherited IRA and not you.
Otherwise, by law that must withhold from the amount a
10% penalty, even if there is technically not one.