Items you will need
- 401k inheritance (non-spousal)
- Estate attorney (recommended)
How to Inherit a Family Member's 401k. If you have inherited a family member's 401k, the good news is you can generally access the money even while the estate is pending taxation and distribution. However, getting the money is subject to tax penalties, though there are strategies you can use to spread the tax bite out so you don't get hit all at once.
Use your estate lawyer's help to gain access to the money in the family member's 401k plan. Most often, the specifics of the 401k plan will allow the payment to be disbursed in a single lump sum. If you inherit a spouse's 401k, you are permitted to then roll the money straight into an Individual Retirement Account (IRA) without paying taxes on it.
Pay both income tax and estate tax on the amount of the lump sum payment you receive. The money is now yours, and you can do what you please with it.
Spread out the tax hit if the person who left you the money qualified under the Internal Revenue Service's provisions allowing you to do so. First, the owner of the account might have had an annuity plan set up prior to her death, and, if so, you can continue simply to receive payments annually. Also, it is sometimes the case that the holder had a payment plan set up that hadn't kicked in when he died, and in this case you might be able to set your own plan up without penalty.
Get together with your financial advisor and put together a plan if you qualify to avoid a lump-sum payment.
See if you qualify for a tax deduction on the money you inherited. If the 401k you inherited is fair game for federal estate tax, you might be able to get a break on the federal income tax.
Remember that the IRS has the final say over what you may and may not do with the money in the 401k account you inherited. In the event that IRS tax law conflicts with the provisions of the 401k, the IRS takes precedence.
Every 401k plan is slightly different and operates according to a slightly different set of rules. The first thing you should do is review the terms of the 401k plan you stand to inherit, using the assistance of an estate lawyer, if needed.
Inheriting a 401k can be very complicated. You should seriously consider working with a qualified professional to help guide your decisions.