04 May I inherited a 401(k) but didn’t know it. What’s next?
Q. My husband passed away in 2018, I inherited his 401(k) plan but I had no idea it existed until my son went through some paperwork. I had it put into my name and I would like to cash it out this year. What do I need to know?
A. The rules for inherited IRAs and 401(k) plans are different for spouses and for other beneficiaries.
When a surviving spouse inherits an IRA or 401(k) plan from their deceased spouse, they can make the account their own and then treat it as if it was always theirs, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.
The rules are different for non-spousal beneficiaries.
“By making it your own, you have the custodian remove your deceased spouse’s name from the account and replace it with your own,” Kiely said. “This is probably what the 401(k) custodian did. They removed your late husband’s name and replaced it with yours.”
Right now, you have three options with the 401(k) plan, he said. You can leave it where it is. You can roll the 401(k) account into an IRA account. Or lastly, you can cash out the plan and pay all federal and state taxes that will be due.
If you want to roll the 401(k) account into your IRA account, you simply notify your husband’s former employer that you want to make a trustee-to-trustee transfer of the account. Your late husband’s employer will probably want the account number and name of the institution where the account is going, he said. Most likely, the former employer will make a check out to Mary Jones IRA, XYZ Bank custodian, for example.
This check is not made out to you, but it’s made to your IRA account.
If you “cash out” the 401(k) account, you will have to pay federal and state taxes, Kiely said.
“I recommend you reach out to your tax preparer. Your tax preparer can tell you how much you should have withheld for federal and state taxes,” he said. “If your tax preparer charges you for this 60 second operation, find a new tax preparer. If you do not have taxes withheld you will have to pay the taxes, plus interest plus penalty come tax time.”
Also keep in mind that if you’re younger than 70 ½, you do not have to take anything out until you reach your Required Minimum Distribution age.
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This story was originally published on May 5, 2021.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.