If you’ve inherited a retirement account, it means you’re the beneficiary of an account from someone who’s passed away. The type of beneficiary you are will dictate your options with respect to the money in the account.
Your options for managing your inherited retirement account depend on whether you’re a non-eligible designated beneficiary or an eligible designated beneficiary (EDB). Several factors determine which one you are, such as your relationship with the original account owner, your status as a disabled or chronically ill person, and the deceased person’s age. You’re an EDB if, on the day of the account owner’s death, you’re one of the following:
- A surviving spouse
- A disabled person
- A chronically ill person
- A minor child—Once the child reaches the age of majority, they’re no longer considered an EDB and can start following the rules for designated beneficiaries.
- An individual who’s not more than 10 years younger than the original account owner
If you don’t meet one of these five conditions, you’re considered a non-eligible designated beneficiary.1
Rules for non-eligible designated beneficiaries
If you’re a non-eligible designated beneficiary and the original account owner had reached their required beginning date (RBD)—the date required minimum distributions (RMDs) must start—before passing, then you must continue to take RMDs but withdraw the entire amount within 10 years of the original account owner’s death.
If you’re a non-eligible designated beneficiary and the original account owner hadn’t reached their RBD, you must still withdraw the entire amount within 10 years of the original account owner’s death, but you’re not required to take RMDs during that time.
In either case, if you leave any money in the account after the 10 years, you’re subject to a 50% penalty on any remaining money.
EDBs and qualified retirement plan accounts
EDBs have more options for withdrawing money from inherited retirement accounts than non-eligible designated beneficiaries, but your options as an EDB depend on your answers to two more questions:
- Are you the original account owner’s surviving spouse and the sole designated beneficiary?
- Did the original account owner reach their RBD before passing? (As we said, it can be confusing.)
Each combination of answers to these two questions has different options for handling your inherited account. Read the summary plan description for the plan—which may be a 401(k), 403(b), or other—as your options may vary by plan and the options listed below may not be available.
|Death before RBD||Death after RBD|
Some of the options listed above deserve further explanation.
Withdrawing the entire amount within 10 years where the original account owner died before the RBD. This means you can take as much or as little as you want each year, but be sure to remove the full amount from the inherited account by the end of the 10 years, as any remaining balance will generally be subject to a 50% penalty.
Receiving RMDs over your lifetime
- If you’re a spouse EDB, you may take the RMDs based on your life expectancy if the account owner’s death came before their RBD. In this case, you must start taking RMDs in the year following the account owner’s death (or if you’re the sole beneficiary, the year the account owner would've attained age 72, if later) based on the beneficiary’s remaining life expectancy.
- If you’re a nonspouse EDB and the original owner’s death came before their RBD, you must start taking RMDs by December 31 of the year after the year the original owner passed away.
- If the account owner died after their RBD, all EDBs must start taking RMDs by the end of the year following the year of the original account owner’s death. Your RMDs are based on the longer of:
- Your life expectancy (recalculated each year), or
- The deceased account owner’s life expectancy (based on actuarial tables at the time of death).
Moving the money—rolling it over—to a retirement account. Spouse EDBs and non-eligible designated beneficiaries have the option of rolling an inherited retirement account into an inherited IRA, subject to any RMDs.
A spouse EDB may also roll over their inherited account received from a qualified retirement plan into their own qualified retirement plan or into their own IRA. In both cases, RMDs will start when the spouse EDB attains age 72.
Note: If the original account owner died after their RBD but didn’t take their RMD for that year, you’ll need to take it on their behalf before electing to make a rollover.2
Get to know your options to make the most of your inherited account
Your options for handling inherited retirement accounts can be tricky to figure out. Determine if you’re an EDB or a non-eligible designated beneficiary and if the original account owner passed before or after their RBD. You can find out which options are available to you with these two pieces of information. And remember to check your plan’s document—your options may differ depending on the plan’s provisions.
1 A non-person designated beneficiary, such as a charity, estate, or certain trusts, follows different rules. 2 There are advantages and disadvantages to all rollover options. Participants are encouraged to review their options to determine if staying in a retirement plan, rolling over to an IRA, or another option is best for them.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.