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I inherited a 401k, can I roll those funds into my IRA?

I inherited a 401k from my father, and am not near retirement. Can I roll this account into my IRA without hitting the contributing limits?

Feb 22, 2012 by Violet from New Bedford, MA in  |  Flag
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5 votes

NO! That would create a very big mess. There are very specific rules in regards to IRA's inherited by anyone other than a spouse. You want to place those funds into an “Inherited IRA” account, and you MUST take Required Minimum Distributions (RMD’s) annually based on your age of inheritance. Failure to take the distribution will cause you to be taxed on the amount you should have taken as well as a 50% penalty (that is 50% of the amount you should have taken!). Further details can be found in IRS Publication 590 (http://www.irs.gov/publications/p590/ch01.html#en_US_2011_publink1000230753). Look for the section entitled IRA Beneficiaries.

Comment   |  Flag   |  Feb 22, 2012 from East Dundee, IL

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3 votes
Jim Blankenship Level 17

In addition to David's excellent advice, you may also be eligible to convert this account to a Roth IRA, paying taxes on any pre-tax funds in the 401(k). You'd still be required to take RMDs from the account, but future growth would be tax free. This maneuver is particularly useful if the 401(k) contains after-tax money (money that was not deductible from income when contributed to the account) as this money can be converted to a Roth IRA tax-free.

You should also learn whether the 401(k) account holds stock in the company that your father worked for. If so, it is possible that you could elect to have all or a portion of the company stock treated with Net Unrealized Appreciation (NUA) taxation. What this means is that only the purchase cost, or basis, of the stock is taxed as ordinary income, and then the growth can be taxed at the much lower capital gains rate. It's relatively complicated to explain here, but if you have a situation like this you must understand that the NUA treatment is only available when the stock is distributed from the 401(k) plan - not from an IRA. So, if this situation applies (there is appreciated company stock in the 401(k) plan) you should make a decision about using NUA treatment BEFORE rolling the funds over into an inherited IRA.

Hope this helps -

jb

1 Comment   |  Flag   |  Feb 22, 2012 from New Berlin, IL
David Schlossberg, RFC, AIF

Jim - great add on's to my thoughts. Spot on...

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Flag |  Feb 22, 2012 near East Dundee, IL

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Steve Casull Level 13

Violet, No Ma-am, you can't roll the inherited money into your retirement money or it would cause an IRS Penalty of over contribution. What is it about your IRA that prompted you to want to roll it there? I'm assuming that you rolled one of YOUR 401Ks into your IRA? It may sound a little confusing, but you will need to have what is called a "beneficiary IRA". I give this advice to many people here, but I mean it always. Find a TRUE Financial Advisor you can trust. Don't pick the first without interviewing a few. I know it is a hassle, but you will see. You need to find someone sincere and legit to YOUR goals. CLick on my name above this box. Go to my website and click on the "Questions" tab to get a list of questions to ask a potential Advisor. Good Luck

Comment   |  Flag   |  May 19, 2015 from South Jordan, UT

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