Now, under the SECURE Act, these distributions must empty the entire account within 10 years of the death of the original account holder. This new law does not explicitly distinguish between IRAs whose holders were already taking RMD and those who were not, so it seems likely that the new 10-year rule will apply to both; however, beneficiaries should consult with a tax advisor. There are also some exceptions to the rule. The Security Act changes the rules surrounding the inheritance of a 401 (k) from a non-marital person.
Under the new law, beneficiaries other than their spouse must receive full payments within 10 years after the account is inherited. If they are minors, the 10-year rule begins when they reach the age of majority. Any withdrawal from the account is taxed as income. If your 401 (k) inheritance is pre-tax, you'll have to pay taxes at some point when you withdraw the money.
If you inherit an IRA and you're not the spouse of the deceased, you can transfer it to an inherited IRA to avoid paying taxes on it right away. IRAs and inherited 401 (k) can be an excellent way to transfer assets from these accounts to beneficiaries who are not part of the spouse, but the rules governing them are complex and subject to error by beneficiaries, custodians and sponsors of the plan. The rules for inherited 401 (k) plans are complicated and are different for spouses than for other beneficiaries. This can be calculated by dividing the total value of the 401 (k) inherited plan by the distribution period along with your age in the IRS individual life expectancy table.
An inherited 401 (k) plan is a 401 (k) plan that is transferred to a beneficiary after the account owner dies. If your legacy 401 (k) plan is a large amount, you may want to accept distributions over a 10-year period to avoid extreme tax changes. This option is exclusive to 401 (k) plan beneficiaries; people who inherit a traditional IRA are not allowed. In this scenario, it is often advantageous to withdraw assets from the IRA or inherited 401 (k) in equal installments over the entire 10-year period.
As a non-spousal beneficiary, funds from an inherited 401 (k) plan must be distributed before the end of the tenth year following the year of death. After inheriting a 401 (k) plan from a parent, consider ways to balance the benefits of expanding tax-deferred investment growth with the fiscal impact of distributions. If you've inherited a 401 (k) plan, you may want to talk to a financial advisor who can help you decide which approach is best for you. If you are the owner or heir of an IRA or other qualified retirement plan, you may want to take some time to consider how the SECURE Act may affect your own retirement accounts and your beneficiaries and reevaluate your retirement, estate planning and giving strategies.
Before the law, if you inherited an IRA or 401 (k), you could generally extend your taxable distributions and tax payments beyond your life expectancy. Inherited individual retirement accounts (IRAs) have long been a method of allowing non-marital beneficiaries to inherit an IRA and allowing the account to continue to grow with deferred taxes over time.