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My wife and I each have 401ks. She passed away last year, so do I roll her account into mine or into my IRA .

I am 59 she was 56

Sep 06, 2016 by willie in  |  Flag
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Peter C. Karp Level 20

Willie

I am sorry for your loss. The other advisors have made some very good points. Many beneficiaries assume that there isn't much to do but close the account and spend or invest the money. But, if you do so without carefully investigating your options, you might be making a very costly mistake because the tax rules that govern an inherited 401k are complex and confusing.

Although 401k plan terms vary, you generally are not required to close your inherited 401k immediately. You can usually keep the account open and allow it to grow tax-deferred for many years. If the plan does require that all the money be withdrawn, a spouse beneficiary may roll the distribution over to an IRA. Contact the provider of your wife’s 401(k) account to obtain the appropriate forms as well as her employer for a copy of the Summary Plan Description that outlines distribution options and spousal benefits. Keep in mind, unlike a 401(k) plan that is protected from creditors, there is a legal liability when moving the rollover from a 401K to an IRA that does not protect the IRA assets from creditors.

As a spouse beneficiary, you have the choice of keeping the account as a "beneficiary account" in the 401k or doing a rollover to your own IRA. If the account is maintained as a beneficiary 401k in the name of the original participant, you can take withdrawals without owing a penalty if you are under age 59½. If you roll over the account to an IRA in your name, you will be subject to early withdrawal penalties until you reach 59½.

By closing the account immediately, you will receive the entire amount during a single tax year. Your distribution will be subject to federal (and possibly state) income taxes. If the amount is significant, the windfall may push you up to a higher tax bracket. Once you inherit a 401k, any money that you receive from it is reported to the federal (and possibly state) government by the 401k trustee under your Social Security number.

Before you take action, we encourage you to get guidance and help from a CPA or attorney familiar with 401k inheritance rules.

Disclosure: The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Infinity Financial Services (a registered broker-dealer, member FINRA, SIPC). Infinity Financial Services and Karp Capital Management are not affiliated companies.

Comment   |  Flag   |  Sep 07, 2016 from San Francisco, CA

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Chris Schiffer Level 14

I am sorry for your loss. There are many options that may be available to you. Employer-sponsored retirement plans generally allowed to specify the post-death distribution options available to you. For example, the IRS may say it is OK for you to leave your 401k inheritance in the account without making withdrawals (and not paying taxes on it), but the plan rules may stipulate that you take it out sooner. You should consult the retirement plan document or summary plan description of the 401k plan to find out what rules will apply to your situation or consult the retirement plan administrator regarding your post-death options as a beneficiary from the 401k.

But, generally distribution options that may be available are:

Life Expectancy Method: This method involves taking distributions over a your single life expectancy (or, in some cases, over the deceased account owner's remaining single life expectancy). Since your wife was younger than you – this might be a good option to stretch out payments for a longer period of time. Under this option, you have another decision to make. You may either start receiving the payments by the end of the year following your spouse's death, or by the end of the year during which your spouse would have turned 70 ½. Again this depends on whether your wife's retirement plan allows for these options.

Five-Year Rule: This method involves taking distributions in any amount and at any time within a five-year period. The five-year period ends on December 31 of the year during which the fifth anniversary of the IRA owner's or plan participant's death occurs.

Lump-Sum Distribution: This distribution method involves withdrawing a your entire interest in an inherited IRA or retirement plan account within one tax year. This can take the form of a single distribution of the entire interest, or multiple distributions spread over the one-year period. With this option, you will also have to pay taxes and on the distribution and it could push you to a higher tax bracket.

Lump- Sum Rollover of the remaining interest: You can elect to roll over inherited funds to your own IRA or your 401k plan account. The benefit of this option is that the funds continue to grow tax deferred, and distributions need not begin until the spouse's own required beginning date. Disclaim the inherited funds: This option means refusing to accept the inherited funds, allowing them to pass to another individual or entity (i.e., a secondary beneficiary such as children). This option is beneficial if you wish assets to pass directly to the secondary beneficiary.

The selection of one option over another is a strategic decision on your need for the funds vs maintaining and maximizing the benefits available to you. I know it is a lot to process and I tried to lay out the options to you as plain as possible. If you would like to discuss your situation in more detail, I can be reached at 908-821-9764 or via email at cschiffer@aepg.com

Comment   |  Flag   |  Sep 06, 2016 from BASKING RIDGE, NJ

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I'm so sorry to hear about your wife. I understand that's it's difficult to deal with the finances when you are grieving.

Depending on her date of passing, you should address this soon so you don't run into any timing issues. Check with her 401(k) plan provider for the right paperwork you need to move the money over to you. They will give you some choices as to whether you want to cash it out (I usually don't recommend this) move it into a beneficiary account, or begin taking withdrawals. After you receive the paperwork, meet with a fee-only planner before deciding so you can make the most of these funds.

Comment   |  Flag   |  Sep 06, 2016 from River Hills, SC

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Peter Cacioppo Level 16

As long as you have good IRA, roll it over. If you don't, I use Fidelity's IRA, thus roll to this and also roll your old IRA to this. Fidelity's branch offices will help you do this. Do not get checks and try to deposit into a new IRA.

Comment   |  Flag   |  Sep 06, 2016 from La Jolla, CA

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Larry R Frank Sr Level 20

Condolences to you about your wife. You are the beneficiary of her 401k and thus you will need to check with her 401k provider to see what your beneficiary options are. You will need to begin taking Required Minimum Distributions (RMDs) and have to calculate those every year as a beneficiary. There are rules about when these have to start and her 401k provider should be able to help you with those. It will also depend on the 401k rules about whether they will allow you to roll it into your 401k ... AND your own 401k rules about rolling an inherited spouses 401k into yours' too.

As to IRA options - that depends on ages and your goals, needs or desires for that money. This short article might be helpful. You may have the option of rolling her 401k into either type of 401k. An advantage of IRAs is that 1) you may have more/better investment choices and 2) IRA custodians tend to work better with beneficiaries as compared to 401k sponsors because the IRA custodians tend to want to keep the assets longer term without having to keep track of employee spouses . http://www.kiplinger.com/article/retirement/T032-C000-S004-when-a-spouse-inherits-an-ira.html

I hope this helps while you also work through your grieving. Best wishes.

Comment   |  Flag   |  Sep 06, 2016 from Roseville, CA

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I'm so sorry to hear about your spouse.

However, you do have some options.

  1. When someone passes away, it does allow you to take money out of the account penalty free before you are 59 1/2. You can do this by rolling it into an inherited IRA. However, you are already 59, so this may not be important to you. This type of account would require you to take Required Minimum Distributions (RMDs) next year.
  2. Roll it into your IRA. You can take money out once you reach 59 1/2 and you wouldn't be required to do RMDs until you turn 70 1/2.
Comment   |  Flag   |  Sep 06, 2016 from Las Vegas, NV

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