I had a client of mine call me from Crane Lake, Minnesota earlier this week. His bachelor uncle had recently died; leaving no wife or children in his will.
Federal law states that surviving spouses automatically inherit their spouse’s company 401(k) plan account. In the case of my client, there was no spouse. He was named the company 401(k) retirement plan account beneficiary. Because my client’s uncle was a bachelor, he inherited the company 401(k) retirement plan account.
The first thing I did was to remind the client that I am not an accountant. I do however know enough of the basics. I reminded my client of the following facts.
Most company 401(k) retirement plans require beneficiaries to withdraw the money in either a lump sum or separate payments. These payments can extend no longer than five years after the company 401(k) retirement plan participant’s death.
Any distributions from the 401(k) account will be added to your taxable income for the year.
Some company 401(k) retirement plan sponsors will allow you to keep the money in the plan indefinitely. The only way to find out is to call them and have them explain their rules.
My client also had the option to transfer his uncle’s 401(k) money into an “inherited IRA.” This IRA would need to be maintained separately from my client’s existing IRA’s. With an inherited IRA, you must withdraw a certain amount each year, based on your life expectancy. Distributions must begin the year following the donor’s death.
One last point: Always withdraw at least the required minimum distribution (RMD) amount each year, if one is specified. If not, you’ll pay a penalty equal to 50 percent of the difference between the RMD and what you actually withdrew.
Bottom line: Talk to a financial or legal expert before taking any action on your inheritance.
Ric Lager
Lager & Company, Inc.
