Tigran Unciano, CFA is a Private Wealth Manager. He specializes in helping families manage their financial affairs when they experience a loss in the family. He also helps families prepare for the anticipated passing of a loved one.

Tigran helps families through the process of taking control of accounts and applying for income benefits. He also provides on-going financial management to ensure that families have enough income to support themselves. Please call Tigran at 602-852-5522 for a free consultation if you have recently lost someone, or expect to lose a family member in the near future.

In last week’s article, Tigran discussed the benefits provided by Social Security when a loved one passes. In next week’s article, Tigran will discuss how to take care of regular bank and investment accounts as well as joint accounts.

Financial Tips for Life after Loss:  Inheriting an IRA or a 401(k)

When the owner of an IRA or 401(k) dies, the remaining funds pass to the named beneficiary (or beneficiaries). These funds typically pass directly to the beneficiary without going through probate, the court-supervised process carrying out a will.

If you are an IRA or 401(k) beneficiary, generally you will be required to take distributions of the inherited funds. You may have more than one option as to how you take the money and the option you choose is very important.

Different types of beneficiaries can inherit an IRA or 401(k) account. The type of beneficiary is important because different rules apply to different types of beneficiaries. The focus of this piece is on designated, primary beneficiaries. Consult a financial advisor, tax advisor or estate attorney to determine if you are, in fact, a designated, primary beneficiary.

Factors that determine distribution options

First, if you have inherited a 401(k) account, the plan is generally allowed to specify the options available to you for taking the money. Your first step should be to consult the 401(k) administrator regarding your options as a beneficiary. A financial advisor can help you determine which option is best for you.

The options available depend on whether or not you are the spouse. For non-spouses, the options generally include the life expectancy method, a lump-sum distribution, the five-year rule, or disclaiming the funds.

A surviving spouse generally has these options too, plus two additional ones. A surviving spouse can roll over inherited funds to his or her own IRA or 401(k) account, or, may leave the funds in an inherited IRA and treat that IRA as his or her own account. (This option does not apply to inherited retirement plans.) In most cases, it will be in a surviving spouse's best interest to exercise one of these two additional options.

Distribution options for designated beneficiaries

Life expectancy method

This method involves taking distributions over a beneficiary's single life expectancy (or, in some cases, over the deceased account owner's remaining single life expectancy). The distributions must begin no later than December 31st of the year following the year of death.

Five-year rule

This method involves taking distributions in any amount and at any time within a five-year period. The five-year period ends on December 31st of the year that is the fifth anniversary of the original account holder’s death.

Lump-sum distribution

This distribution method involves withdrawing the entire amount in one tax year. This can take the form of a single distribution of the entire interest, or multiple distributions spread over the one-year period.

Roll over the remaining interest (surviving spouse beneficiaries only)

This option involves "rolling over" the surviving spouse's interest into the spouse's own IRA or plan. Once in the spouse's IRA or plan, the funds continue to grow tax deferred, and distributions need not begin until the spouse's own required beginning date. Also, the spouse can name beneficiaries of his or her choice.

Roll over the remaining interest (non-spouse beneficiaries only)

Non-spouse beneficiaries can not roll over inherited funds to their own IRA, however, the Pension Protection Act of 2006 lets a non-spouse beneficiary make a direct rollover to an inherited IRA. Once in an IRA, distributions can be spread over the longest period of time, reducing income taxes. There are complicated rules associated with this option therefore it is imperative to seek professional advice before making this selection.

Disclaim the inherited funds

Any designated beneficiary can opt to disclaim his or her share of the inherited IRA or plan account. Disclaiming simply means refusing to accept the inherited funds, allowing them to pass to another individual or entity (i.e., a secondary beneficiary). A qualified disclaimer must be completed within nine months of the date of death. This nine-month deadline usually occurs before the September 30 next-year date. Disclaiming sometimes makes sense for tax and/or personal reasons.

Taking Control of Accounts and Starting Distributions

If a beneficiary intends to cash out all money inherited from an IRA or 401(k), generally he or she is required to provide proof of death of the original account holder to the institution where the money is held, along with identification that they are in fact the beneficiary, and the method for how they would like to receive the money (by check or by direct deposit to a bank account, for example). Once the money has been paid it is the beneficiary’s with no restrictions. However, the beneficiary will be responsible for income taxes.

401(k)

If the money will be kept with the deceased family member’s 401(k) plan, then the beneficiary must contact the plan administrator to begin receiving money.  Generally the beneficiary will be required to submit forms that verify he or she is the beneficiary, as well as proof of death of the original account holder, such as a death certificate. Typically the plan administrator will provide paperwork to select the payout option and the payout will start according to the option selected.

IRA

If the money will be rolled into an inherited IRA, generally the first step is to open an inherited IRA account at a financial institution. Once open, the beneficiary must provide proof of death, such as a death certificate. Money will then be rolled from the original IRA to the inherited IRA and distributions will generally begin by December 31^st of the year the original account holder died. It is important to note that a minimum distribution is required by law each year however a beneficiary may withdraw more than the minimum.

On-going Management of Inherited Accounts

To maximize the value of an inherited account it is important to keep the account growing. That way the account continues to replenish what is taken each year. A qualified wealth manager, like Tigran, can help beneficiaries properly invest inherited accounts and keep them providing income for the entire life of a beneficiary.

Questions, comments, feedback? Call Tigran at 602-852-5522.

Please remember that due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Hatton Consulting, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request. Some content provided by Forefield Inc. Forefield Inc. does not provide legal, tax, or investment advice. All content provided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

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