You can accept a qualified inherited 457 retirement account as a lump-sum payment and pay taxes on the full amount. However, by rolling over the account, you can stretch out the distributions -- and the taxes on the distributions -- over an extended period. As a nonspousal beneficiary, you can roll over the inheritance to an individual retirement account, but you must set up the IRA properly.
To defer taxes on an inherited 457, you must open an “inherited IRA.” This type of account has special rules. You must register an inherited IRA in the name of the deceased for your benefit as a nonspousal beneficiary. You then arrange a trustee-to-trustee transfer from the deceased’s 457 plan to the inherited IRA. The Internal Revenue Service doesn't allow you to contribute or roll over any more money into this IRA, and you can’t roll any money out. You do have the right to decide how the money is invested.
Required Minimum Distributions
You are required to take distributions from your inherited IRA according to IRS regulations. The distribution schedule depends on the final age of the deceased relative to the required beginning date for distributions. That date is April 1 of the year following the one in which the 457 plan owner reaches age 70 1/2. If the owner died after the required beginning date, you can stretch out distributions over the life expectancy of the deceased as of the year of death.
A Longer Stretch
If the owner died before reaching the required beginning date, the distribution period depends on the life expectancy of the “designated beneficiary,” who is the oldest beneficiary as of Sept. 30 of the year after the death of the owner. If you are the sole beneficiary, you’re also the designated one. The distribution period is the life expectancy of the designated beneficiary or that of the deceased in the year of death, whichever is longer. You have one other option, which is to take the full distribution by the end of the fifth year following the year in which the deceased died.
You can roll the inherited 457 plan into a Roth IRA and include the full amount in your current taxable income. You will not have to pay taxes when you take money out of the Roth IRA. You must follow the same distribution rules as those for a traditional inherited IRA. You don’t have to worry about paying a 10 percent penalty on distributions you take before age 59 1/2 -- these penalties don’t apply to inherited employer plans or IRAs.
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