If you have recently inherited a 401(k) or an Individual Retirement Account (IRA), you may be the recipient of substantial financial assets. Unfortunately, however, you may also be facing unwelcome tax complications. At Surprenant & Beneski, P.C., our skilled estate planning attorneys are well-prepared to guide you through, refreshing your tax strategies to cope with this windfall in the most productive way possible.
As accomplished estate planning lawyers, we have a proud history of serving clients in Southeastern Massachusetts for a long time, handling tax issues like these effectively and efficiently. Contact us as soon as possible to discuss your best options.
Understanding Inherited Retirement Accounts
When you inherit a 401(k) or an IRA, tax implications may vary significantly based on several factors: [1] your relationship to the deceased [2] the type of account inherited, and [3] the decisions you make regarding the disbursement of the account.
Type of Retirement Account
Traditional 401(k)s and IRAs typically contain funds that have not been taxed. Upon withdrawal, these funds become taxable income. In contrast, Roth 401(k)s and IRAs contain post-tax contributions, and withdrawals are generally tax-free, assuming certain conditions are met.
Beneficiary Relationship
As a spouse, you have a unique option: you can treat the inherited 401(k) or IRA as your own. This means you can roll it over into your existing IRA or a new one, deferring taxes until you start taking distributions. If you are younger than 59 and a half, this can be particularly advantageous since it avoids the 10 percent early withdrawal penalty.
Non-spouses inheriting these accounts do not have the option to roll them into their own retirement accounts. Under the SECURE Act, most non-spousal beneficiaries are required to withdraw the entire balance of an inherited retirement account within 10 years following the year of inheritance. Tax implications vary depending on whether the account is a traditional or Roth account.
Means of Disbursement
If you choose to withdraw the entire balance of an inherited 401(k) or IRA all at once, the entire sum will be added to your taxable income for that year which can bump you into a higher tax bracket. In contrast, spreading out the withdrawals can help manage your tax liability over several years. Our capable attorneys will help you create a smart distribution strategy to protect your assets.
Previously, beneficiaries could stretch out the distributions (and the tax obligations) over their lifetime, known as the “stretch IRA” strategy. However, this has been largely eliminated for non-spousal heirs by the SECURE Act, which now necessitates withdrawals within a 10-year period. This can lead to significant tax implications, especially in higher tax brackets.
Strategies to Mitigate Tax Burdens
To mitigate tax burdens, it is essential to understand the timing requirements for withdrawals to avoid unnecessary penalties. For instance, if the original account holder was already taking RMDs, you may have to continue these distributions during the year you inherit the funds.
Consider Your Tax Bracket
If you inherit a traditional 401(k) or IRA, consider your current tax bracket before making withdrawals. If you expect to be in a higher tax bracket in the future, it may be beneficial to take larger distributions earlier.
Ask the Professionals
Tax laws are not only intricately conceived and worded; they are also subject to change. Consulting with an estate planning attorney will provide you with customized advice, invaluable in helping you navigate your particular situation.
Contact Our Experienced Estate Planning Attorneys Now
Inheriting a 401(k) or IRA presents both opportunity and challenge. Understanding the tax implications is crucial to managing your inherited assets wisely. At Surprenant & Beneski, we will help you make informed decisions that align with your tax situation and your financial goals. With care and strategic planning, we can assist you in securing your future and your legacy. Contact our attorneys today.