Santa Clara Inheritance Lawyer Answers, “I Just Inherited a Retirement Account-Now What?”

Inheriting a retirement account, such as a 401(k) or an IRA, can benefit a person struggling with their finances. It can help pay bills and create more stability. However, any Santa Clara inheritance lawyer will tell you that ignoring federal regulations can lead to significant tax penalties!

The rules applying to your inherited account depend on many factors, including your relationship with the deceased. The SECURE Act of 2019 requires most heirs to empty retirement accounts within ten years of the original account holder’s death if they died after December 31, 2019. Prior laws allowed beneficiaries to distribute funds over longer periods during their lifetime.

Unless you meet a specific exception to this law, you must deplete your inherited 401(k) or IRA within ten years of your loved one’s death.

Options for Spouses Inhering a Retirement Account

A surviving spouse has more than one option after inheriting a retirement account. You can roll the money from your deceased spouse’s IRA into your own. When you turn 73, you must make minimum distributions based on your life expectancy. This is a beneficial option if you don’t need the additional income. You can continue to grow the account until you reach the required age.

However, you are subject to a ten percent early withdrawal penalty if you withdraw from the account when you’re under 59½ years old. To avoid the penalty, you could choose not to roll the funds into your IRA and instead remain the beneficiary of your inherited IRA. You don’t have to make the required minimum distributions until your spouse would have turned 72 (73 if they died in 2023 or later), and those withdrawals will depend on your life expectancy.

Flexibility for Minor and Dependent Beneficiaries

A non-spouse who is a minor can avoid the ten-year rule until they are a legal adult. that means turning 21, regardless of your state’s age of majority. Before then, minor children can withdraw from the account based on the required minimum amount, and once they turn 21, they must deplete the funds within ten years.

A disabled or chronically ill child, or any person not more than ten years younger than the original account holder, bypasses the ten-year rule entirely. They can take distributions from the IRA or 401(k) based on their life expectancy. Since the ten-year rule doesn’t apply, they don’t have to empty the account within ten years.

How to Follow the Ten-Year Depletion Rule for an Inherited Account

Considering how to meet the requirement is crucial if you inherit a retirement account and must follow the ten-year rule. You may be subject to required annual withdrawals during the 10-year period (these regulations are complicated and still in draft form). You can set up an inherited IRA and transfer money into it whether you receive an IRA or 401(k).

You should consider the tax implications of the account. Typically, Roth account distributions are tax-free. Leaving the money where it is might be more beneficial regardless of when you withdraw funds during the ten-year timeframe.

If you inherit a traditional 401(k) or IRA, consider the tax consequences before taking distributions. Money from traditional retirement accounts is taxed as ordinary income. That means withdrawing a significant amount can bump you into a higher tax bracket. Spreading your distributions out over the next ten years could minimize the taxes you’ll owe on your inherited funds.

You can incur a 25 percent penalty if you don’t deplete the retirement account when and as required.

Contact Our Santa Clara Inheritance Lawyers for Help with Your Inherited Retirement Account

Managing an inherited 401(k) or IRA can be complicated. You want to avoid costly penalties but need to learn how to structure your distributions. With careful planning, you can optimize your additional income while managing incurred taxes.

An experienced Santa Clara inheritance lawyer can assist you with your inherited retirement account. Contact us today at 408-889-1290 to learn more about the available options. We will review your circumstances and create a plan to meet your unique needs.