Prince William County
Prince William County
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 Woodbridge inheritance lawyer will tell you that ignoring federal regulations can lead to significant tax penalties!
The rules applying to your inherited account depend on your relationship with the deceased. The SECURE Act of 2019 requires 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 72, 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, don’t roll the funds into your IRA and choose to remain the beneficiary of your inherited IRA. You don’t have to make the required minimum distributions until your spouse would have turned 72, 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. Typically, that means turning 18. Before then, minor children can withdraw from the account based on the required minimum amount, and once they turn 18, they must deplete the funds within ten years.
A disabled or chronically ill child 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. Depending on the age of the original account holder when he or she died, you may or may not be subject to a specific annual withdrawal amount. If you are not, then you only have to ensure you distribute all the funds within ten years. 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 50 percent penalty if you don’t deplete the retirement account within the required period.
Contact Our Woodbridge 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 Woodbridge inheritance lawyer can assist you with your inherited retirement account. Contact us today at 703-492-9955 to learn more about the available options. We will review your circumstances and create a plan to meet your unique needs.
David Wilks has practiced law in Northern Virginia and
Prince William County for more than thirty years as
a tax lawyer by training and education. Read More