A 401(k) retirement account may be left to a spouse, relative, or friend after the death of a loved one. Here are the guidelines and your options if you inherit such an account.
Losing a spouse is a difficult experience, and dealing with their financial affairs can be overwhelming. One question that may arise is whether you can roll over your deceased spouse’s 401(k) into your own retirement account. The answer is yes, but there are a few things to keep in mind.
What Happens to a 401(k) When the Owner Dies?
When a 401(k) owner dies, the money in the account becomes part of their estate. The beneficiaries named on the account will then receive the money. If there is no named beneficiary, the money will go to the deceased person’s estate and be distributed according to their will.
Options for a Spouse Beneficiary
If you are the spouse of the deceased 401(k) owner, you have several options for what to do with the money:
- Take a lump-sum distribution. You can receive the entire amount of the 401(k) in a lump sum. This will be taxed as ordinary income, and you may also be subject to a 10% early withdrawal penalty if you are under age 59½.
- Roll over the money into your own IRA. This is the most common option for spouses. You can roll over the money into a traditional IRA or a Roth IRA. If you roll over the money into a traditional IRA, it will continue to grow tax-deferred. If you roll over the money into a Roth IRA, it will be taxed when you withdraw it in retirement.
- Leave the money in the deceased spouse’s 401(k). You can leave the money in the deceased spouse’s 401(k) and continue to make contributions to it. However, you will need to name a new beneficiary for the account.
- Disclaim the inheritance. You can disclaim the inheritance, which means that you will not receive the money from the 401(k). The money will then go to the next named beneficiary on the account.
Rolling Over a Deceased Spouse’s 401(k) into Your Own IRA
If you choose to roll over your deceased spouse’s 401(k) into your own IRA, there are a few things you need to do:
- Contact the deceased spouse’s 401(k) plan administrator. They will provide you with the necessary paperwork to complete the rollover.
- Choose an IRA to roll the money into. You can open a new IRA or roll the money into an existing IRA.
- Complete the rollover paperwork. This will include providing the 401(k) plan administrator with the name and account number of the IRA you want to roll the money into.
Benefits of Rolling Over a Deceased Spouse’s 401(k) into Your Own IRA
There are several benefits to rolling over a deceased spouse’s 401(k) into your own IRA:
- Tax-deferred growth. The money in the IRA will continue to grow tax-deferred until you withdraw it in retirement.
- Tax-free withdrawals. If you roll the money into a Roth IRA, you will be able to withdraw it tax-free in retirement.
- Consolidation of retirement accounts. You can consolidate your retirement accounts into one IRA, making it easier to manage your investments.
Considerations When Rolling Over a Deceased Spouse’s 401(k) into Your Own IRA
There are a few things to consider when rolling over a deceased spouse’s 401(k) into your own IRA:
- Taxes. If you roll the money into a traditional IRA, you will have to pay taxes on the money when you withdraw it in retirement. If you roll the money into a Roth IRA, you will have to pay taxes on the money now, but you will be able to withdraw it tax-free in retirement.
- Required minimum distributions (RMDs). If you are over age 72, you will be required to take RMDs from your IRA each year. This is not the case with a 401(k).
- Beneficiary designations. You will need to name a new beneficiary for your IRA.
If you are the spouse of a deceased 401(k) owner, you have several options for what to do with the money. Rolling over the money into your own IRA is a common option that can provide you with tax-deferred growth and tax-free withdrawals in retirement. However, there are a few things to consider before making this decision, such as taxes, RMDs, and beneficiary designations.
Frequently Asked Questions
Can I roll over my deceased spouse’s 401(k) into my Roth IRA?
Yes, you can roll over your deceased spouse’s 401(k) into your Roth IRA. However, you will have to pay taxes on the money now.
Do I have to take required minimum distributions (RMDs) from my deceased spouse’s 401(k)?
No, you do not have to take RMDs from your deceased spouse’s 401(k) if you are under age 72. However, you will need to start taking RMDs from the 401(k) once you reach age 72.
Can I leave the money in my deceased spouse’s 401(k)?
Yes, you can leave the money in your deceased spouse’s 401(k). However, you will need to name a new beneficiary for the account.
What happens if I disclaim the inheritance?
If you disclaim the inheritance, the money will go to the next named beneficiary on the account.
Disclaimer
I am an AI chatbot and cannot provide financial advice. The information provided above is for general knowledge and informational purposes only, and does not constitute professional financial advice. It is essential to consult with a qualified financial advisor for any financial decisions.
What Are the Penalties for Withdrawing Money Before Age 59½?
In order to avoid incurring an early withdrawal penalty from an inherited IRA, spouses may choose to move the 401(k) funds into the inherited IRA. Spouses must still pay income taxes on the money they withdraw, though. Non-spouse beneficiaries of 401(k)s are permitted to withdraw funds from the account at any time without incurring penalties under the SECURE Act, provided that the account’s balance is exhausted by the end of the tenth year after the account owner’s passing. This is called the 10-year rule.
What Is a 401(k)?
An employer-sponsored retirement plan, or 401(k), is usually funded by payroll deductions. As part of their benefits package, many employers match all or a portion of the contributions made by their staff.
Because traditional 401(k)s are funded with pretax money, the amount of your contribution lowers your taxable income. Taxes won’t become payable until you take money out of the account. When you make contributions to a Roth 401(k) with after-tax money, you pay income taxes right away, but when you take money out, it’s not taxed.
When you turn 59½, you can take withdrawals from your 401(k) without incurring penalties. When you turn 73, you must begin taking required minimum distributions, or RMDs. Any money left over after your death will go to the people you designate as beneficiaries. In the event that you fail to designate a beneficiary or that beneficiary has passed away, the account will be included in your estate.