IRA Accounts, 401(k) Accounts, Pensions, and Annuities
If the type of inheritance you received was an IRA, 401(k), 403(b) plan, 457 account, pension, annuity, or other type of tax-deferred or retirement-type of account, then proceed with caution. You will pay tax on all or most of this inheritance, with few exceptions." You will need to refer to the decedent’s prior tax returns and/or contact the administrator of the retirement account to determine the non-taxable part, if any, of an inherited IRA, 401(k), pension, annuity, or other tax-deferred account.
The inherited retirement account will not be taxable to you until you withdraw the money from the account. Therefore you will have some control over when you will have to claim the inheritance on your taxes.
I’ll present some general information on these types of inheritances, but be cautioned that each account should be individually examined for specific tax laws, the taxable amount should be individually calculated, and withdrawals carefully planned for maximum tax savings.
If you inherit the retirement account from your spouse, you may be able to roll over the account into your own retirement account and treat it with the same rules as your own account. You may also be able to re-name the inherited account and treat it with the same or similar rules as your deceased spouse.
Non-spouses may be able to roll the money over into a special type of Inherited IRA account. To defer taxes, it may not be rolled over into your own existing regular IRA account and you may not receive a check directly, even if you immediately deposit the check into the special Inherited IRA.
You must begin taking required minimum distributions from an Inherited IRA by Dec 31 of the year following the decedent’s death. Otherwise, you will be required to withdraw all of the funds by the end of the fifth year after the decedent’s death. In this case, you can take as much or as little as you want in each of the five years, as long as balance in the account is zero at the end of the fifth year.
Non-spouses may also have the option of rolling inherited non-IRA retirement accounts into an Inherited Retirement Account. The terms of the original plan and the IRS code will then determine when you must take withdrawals from the plan.
For inherited ROTH IRA accounts, if the five year waiting period for the ROTH IRA account has already passed, then withdrawals of your inheritance from these types of accounts should be tax-free.
With any of the inherited retirement plans, you should also have the option to immediately withdraw all of the funds in a lump sum and then claim this inheritance on your taxes in full (less any basis of the decedent) in the year you withdrew it.
Yes, it’s a little complicated. Since the amounts inherited in IRA’s, 401(k)’s, 403(b) plans, 457 accounts, annuities, and other retirement-type accounts tend to be fairly large, you are well advised to consult with a CPA or tax accountant who will help you determine the best timing and amounts to withdraw from these accounts.