It used to be that, if you inherited a 401(k) plan from your spouse, you were in a much better position than non-spouses who inherited 401(k)’s. Spouses Spouses are allowed to roll over inherited 401(k) funds directly into their own, existing IRA. This is a huge benefit, because this rollover is tax-free, and the inherited funds can grow and compound until they’re needed during retirement. Non-Spouses: The Old Rules Until 2007, the rules for non-spouses were not nearly so generous. For most 401(k) plans, a non-spouse beneficiary had to withdraw all the funds from the account within 5 years, paying taxes on the money taken out. So, on top of a possibly sizeable tax bill, the beneficiary lost the potential for tax-deferred growth of the inherited money. Non-Spouses: The New Rules Since 2007, though, non-spouses have been allowed to roll over inherited 401(k) plans – with certain restrictions:
- The 401(k) money has to be rolled over into a newly established, “inherited” IRA. Transferring the money into an existing IRA will trigger a tax bill.
- The money has to be transferred directly by the plan administrator from the 401(k) to the inherited IRA. If the check is sent to the beneficiary, then directly deposited into the IRA, the rollover is no good, and taxes are due.