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What to do when inheriting a 401(k)

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By Jason Alderman

 

Talk about good news wrapped in bad: In the midst of grieving the loss of a loved one, you learn that you were named beneficiary of their 401(k) plan. Chances are you’ve got too much on your mind to make any sudden decisions about what to do with the money.

However, don’t procrastinate too long. The IRS has ironclad rules, deadlines and penalties concerning inherited retirement accounts, which vary depending on what type of account it is. This column discusses inherited 401(k) and similar employer-provided plans.

Under federal law, surviving spouses automatically inherit their spouse’s 401(k) plan unless someone else was named beneficiary and the surviving spouse signed a written waiver. If someone is single at death, their plan’s assets go to their designated beneficiary.

The IRS has basic tax and distribution rules and timetables for inherited 401(k) plans. However, the plans themselves are allowed to set more restrictive guidelines if they choose, so read the plan documents carefully. 

You must pay income tax on distributions (except for Roth accounts, which have already been taxed), although you may be able to spread out withdrawals and tax payments over a number of years, depending on how you structure it.


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