Inheriting a Retirement Account: Making the Right Decisions for Your Future 

Inheriting a retirement account from a parent can be both an emotional and financial milestone. While the inheritance may provide a sense of security, it also comes with a number of important decisions that could impact your financial future. Whether you’re preparing to inherit a retirement account or have just received one, understanding your options is crucial to ensure that you make the most of this financial gift. 

When you inherit an IRA or 401(k), it’s important to recognize that there are specific rules and options available to you, and the choices you make now can affect your tax liabilities, your income during retirement, and your long-term financial security. Depending on the type of account you inherit—whether it’s a traditional IRA, Roth IRA, or 401(k)—you may have several different paths to choose from. Additionally, the SECURE Act, which was passed in 2019, introduced significant changes to distribution rules for inherited IRAs, especially for non-spouse beneficiaries. 

Key Decisions You’ll Need to Make 

1. How to Take Distributions 

When you inherit a retirement account, you’ll typically be required to begin taking distributions. The IRS has specific rules that dictate when and how these distributions must occur, especially under the SECURE Act. In some cases, you may be able to stretch the distributions over your lifetime, while in others, you may be required to take the full distribution within a 10-year period. 

2. Consider Tax Implications 

Inheriting a traditional IRA or 401(k) means that any distributions you take will be taxed as ordinary income. The timing of these withdrawals can have a significant impact on your overall tax liability, especially if you’re still working or in a higher tax bracket. On the other hand, inherited Roth IRAs offer the benefit of tax-free withdrawals, as long as the account has been open for at least five years.  

3. Beneficiary Options 

You have options when it comes to what you do with the inherited account itself. You can opt to keep the inherited IRA or 401(k) in your name and continue to manage it as you see fit, or you may choose to transfer the assets into your own retirement account, depending on the type of account. Each option has distinct tax consequences and withdrawal rules. 

4. Roth Conversions for Inherited Accounts 

Another potential strategy to explore is converting the inherited retirement account into a Roth IRA, which can provide you with tax-free growth moving forward. However, any amount converted to a Roth IRA will be taxable in the year of conversion, so it’s important to carefully consider the tax implications before making this decision. Click here to learn more about Roth Conversions.