Can an Inherited 401(k) Be Rolled Over to an IRA?

Moving an inherited 401(k) to a beneficiary IRA can help spread out the tax burden.

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If you inherit a 401(k) plan, many companies often cash you out shortly after you inherit the plan, which makes the entire amount taxable. However, the Pension Protection Act, passed in 2006, allows all beneficiaries to move money to an IRA. Nevertheless, you're limited as to how the movement takes place if you're not the spouse of the decedent.

Spousal Options

If you inherit the 401(k) plan from your spouse, your options for handling the inherited account are significantly broader than for any other person. A spouse has the option to treat the inherited 401(k) plan as his own. If, as the surviving spouse, you treat the 401(k) as your own, you can then roll over money from the inherited 401(k) plan into an IRA in your name. For example, if you have your own IRA, you can take money out of the 401(k), which is now treated as your own, and roll that money into your own IRA. These options are in addition to the options available to any other beneficiary.

Transfer for Non-Spouses

The IRS differentiates between rollovers and transfers. With a rollover, you receive the money and then within 60 days, you redeposit the money into the new account. With a transfer, the trustee of the first plan deposits the money directly into the second plan -- you never touch the money. If you're not the decedent's spouse, you can't roll over money from an inherited 401(k) into an IRA, either as a beneficiary or in your own name. However, you can move the money to a beneficiary IRA through a transfer. To do so, the money has to be moved by the 401(k) plan trustee to the IRA, without the money being paid to you first. The receiving IRA has to be titled as a beneficiary IRA and you can't commingle the inherited funds with your own IRAs.

Distributions Still Required

When you transfer the money to a beneficiary IRA, you're still responsible for taking the required distributions each year. If you're a non-spouse beneficiary, you have to either take annual distributions based on your life expectancy or you have to empty the entire account by the end of the fifth year after the decedent died. For example, if the decedent died in 2014, you could either take annual distributions based on your life expectancy, or you could empty the account by the end of 2019.

IRA Contributions

As long as you have earned income and you're under 70 1/2 years old, you can use distributions from the inherited 401(k) plan to make a contribution to your own IRA. For example, if you don't have enough money in your budget to contribute to your traditional IRA this year, but then you inherit a 401(k) plan, you can use the distribution to contribute to your IRA. On your taxes, you'll have to include the distribution from the inherited 401(k) as taxable income, but, assuming you qualify, you can deduct the contribution to the traditional IRA.

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About the Author

Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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