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Question: Transferring 401k Inheritance
Posted on 9/27/12 at 8:07 am
Posted on 9/27/12 at 8:07 am
Wife received an inherited 401k (state employees version) and we are looking to put the money somewhere where it is easily accessible when it may be needed. We do not want to take it in one lump sum, this would result in 75% of it to be taxed at an extra 3-5%. What would be the best product to deposit it into, and still avoid withdraw penalty, and have the ability to withdraw over several years?
If taken as cash right now, there is no 10% early withdrawal fee assessed, just treated as ordinary income tax.
Thanks for any input....
If taken as cash right now, there is no 10% early withdrawal fee assessed, just treated as ordinary income tax.
Thanks for any input....
1
Posted on 9/27/12 at 8:15 am to Drilltiger
Inherited IRA or Beneficiary IRA (these are not products, but how you title the account). This will allow you to withdraw without a 10% penalty. You will be required to take Required minimum distributions based on your wife's life expectancy. You will be able to invest the money anyway you like ie: stocks, bonds, cash, cds,etc.
Posted on 9/27/12 at 8:59 am to tigerrocket
Thanks, I have heard the term before, thought it was a separate product....I will look into it.
Posted on 9/28/12 at 3:20 am to Drilltiger
If memory serves me correctly, if she does not withdraw based on life expectancy then she has something like 5 years to take the money out of the account.
I'll say this, the IRS does not understand their own rules on this. What can happen is when the money is transferred to the account, the bank/brokerage firm that transfers it might code it as a distribution. The IRS will understand this to mean the money was paid out and they will tax the entire amount. It takes ALOT of explaining to the IRS as to what happened to the money and why it shouldn't be taxed.
I'll say this, the IRS does not understand their own rules on this. What can happen is when the money is transferred to the account, the bank/brokerage firm that transfers it might code it as a distribution. The IRS will understand this to mean the money was paid out and they will tax the entire amount. It takes ALOT of explaining to the IRS as to what happened to the money and why it shouldn't be taxed.
Posted on 9/28/12 at 3:13 pm to CajunTiger92
Non spouse heirs can now use life expectancy rather than the 5 year rule. I have seen some 401k plans that have not been updated to reflect this change, but it is allowed with inherited iras. It is very important that the custodian title the account correctly. If they don't there is usually nothing you can do to fix it. Talk to a CPA and/or financial advisor before you do anything.
Posted on 9/28/12 at 5:22 pm to tigerrocket
That is a good point about the title. I have seen the IRS require alot of explaining even when the account title is correct because the firm transfering the account will not (or can not) code it properly. If it is not coded properly you will get a nice friendly letter from the IRS that claims you owe ALOT of taxes.
To avoid confusion, I wonder if it might be better to open the inherited IRA account at the same bank/brokerage where the IRA to be inherited is on account. That would establish a business relationship with the heir and help make sure they report things properly to the IRS. The account can always be moved later if so desired.
To avoid confusion, I wonder if it might be better to open the inherited IRA account at the same bank/brokerage where the IRA to be inherited is on account. That would establish a business relationship with the heir and help make sure they report things properly to the IRS. The account can always be moved later if so desired.
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