Article: Rollovers of Retirement Accounts Inherited from a Non-Spouse


	Gerry Henderson

March 2007

Rollovers of retirement accounts inherited from a non-spouse

A newly amended tax law allows non-spouse heirs to rollover account proceeds

A recent law change made an important improvement for certain beneficiaries of a company’s defined contribution retirement plan, such as a 401(k). For the first time, heirs of a plan participant will be able to rollover the participant’s account to an IRA even though they’re not the plan participant’s spouse. (Surviving spouses were able to do this even under the prior law.)

The ability to rollover the funds to an IRA offers the opportunity to defer the tax that would otherwise be due if the entire inherited amount was distributed in a lump-sum. For example, suppose that Sarah inherits her uncle’s $100,000 401(k) account at his death. Under pre-2007 law, she would likely have received the full $100,000 in a single distribution and be taxed in the year of receipt.

Under the newly revised law, if the company’s plan allows it, Sarah can instruct the 401(k) plan sponsor-administrator to do a trustee-to-trustee transfer of the $100,000 to an IRA that she sets up solely to receive the distribution. She can then spread out the distribution over a period of years, thereby allowing the funds to build up tax deferred. (If she chooses this approach, she will always have the option of accelerating the distributions if she needs the cash.) The difference between taking the money now in a lump sum versus leaving it in an IRA as long as possible can be in the tens of thousands of dollars (or more), depending on the size of the inherited account. The timing of the transfer may be critical as well.

There is really no downside to rolling over the inherited retirement account to an inherited IRA, as you can always take the money out if desired or needed. However, for a rollover to be tax free, you must arrange for a trustee-to-trustee rollover from the plan directly to a new IRA established for that purpose. In addition:

Do not take the cash with the intention of rolling it over later.
The funds should not be transferred to an existing IRA.
No additional contributions should be made to this new IRA.
The IRA must be titled as an inherited IRA, e.g., “Sarah Stephens as beneficiary of Dick Stephens’ IRA.”
Finally, in certain circumstances, the rollover will need to be completed no later than the year following the account owner’s death.

For specific guidance on how to rollover a retirement account that you inherit from a non-spouse, please contact your Schmidt Westergard & Company professional.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.