Retirement Plan Beneficiaries

October 13, 2015 by admin

When inheriting retirement assets from a parent, grandparent, or anyone who is not your spouse it’s critical to fully understand all of your options before making a costly decision that may have serious tax consequences. That’s because distribution options for non-spouse beneficiaries of IRA, 401(k), or similar qualified plans are complex and determined by several factors, including:

• Whether or not the beneficiary is a minor*
• If the retirement account owner died before the required beginning date (RBD) for plan distributions
• The age of the beneficiary in relation to the age of the deceased at the time of death

Two of the most common distribution methods for non-spouse beneficiaries who are not minors are:

• Inherited IRA – While non-spouse beneficiaries can’t roll over an inherited retirement account into their own IRA, they may be able to do a trustee-to-trustee transfer into an “inherited IRA.” Non-spouse beneficiaries have five years after the death of the account owner to take the money out. If they take the money in a lump sum by the end of the fifth year following the account owner’s death, they will pay ordinary income taxes on the entire amount.
• Stretch IRA – The IRS also allows beneficiaries to “stretch” distributions over the course of their projected lifespan. Using this method, non-spouse beneficiaries elect to have the money paid out over their lifetimes and pay ordinary income taxes on the amount they receive each year. Stretching withdrawals over the course of a non-spouse beneficiary’s projected lifespan enables potentially decades of extra tax deferred (or in the case of Roth IRAs, tax free) growth.

However, it’s important to note that these are not your only options and tax implications can vary greatly between options. If you inherit retirement assets, be sure to check with the plan provider about your available options or contact us at (714) 634-8051 for a no-obligation consultation.