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I am 74 years old (I was born on February 2, 1948). My wife and I both worked for Aetna, but are retired and have 401(k)s from work with Vanguard. I received that 401(k) as a spousal inheritance and maintain it in a separate account. I plan on taking RMDs on her account but I’m not sure if I have the option to take RMDs based on her age or my age. She didn’t start taking RMDs on her account because she wasn’t 72. Can you confirm what age (his or mine) I should use for the first RMD withdrawal, and by what date that RMD needs to be taken? I believe there is a provision in the law that states that with a spousal inheritance you don’t have to start taking RMDs from the inherited account until one year after the year of death.
– Gary
First his date and amount Minimum distribution required (RMD) depends on what you decide to do with the inherited 401(k). The answer will vary depending on whether you roll the funds into your own 401(k) or IRA; Transfer the account to an inherited IRA and take RMDs from it; Transfer the money to an inherited IRA and follow the 10-year rule; Or do a Roth conversion. Here’s a closer look at those options and what they mean for RMDs. (And if you need to plan for RMDs or other help with taxes in retirement, Talk to a financial advisor.)
As a surviving spouse, you have the option to roll over the inheritance 401(k) In your own 401(k) or IRA. You can roll it into an existing account, open a new IRA to get the rollover.
If you go this route, the money will be treated as yours and subject to the same RMD requirements as if you had kept it in your account. Since you are 74 and no longer working, you will need to take an RMD by December 31 and the amount is calculated based on your age and Uniform Lifetime Table. (But if you need more help calculating your RMD, Consider contacting a financial advisor.)
Transferring money to an inherited IRA is one way to manage an inherited 401(k).
Instead of rolling it into your own IRA, you can roll it into one Inherited IRA. This has the advantage of allowing you to delay RMDs until after two deadlines:
In your case, it sounds like it would allow you to wait a few years before taking RMDs. As long as you take your first RMD by December 31 of the year your wife would have turned 73, you should avoid the penalty.
At that point, however, RMDs will still be calculated based on your age. You will not be able to use your spouse’s age to reduce the RMD amount. (A Financial advisor (May be able to help you manage inherited retirement accounts and other assets.)
Because RMDs did not begin early, you can choose not to take RMDs until the entire account is distributed by December 31 of the 10th year after your spouse’s death.
This will save you the hassle of calculating RMDs during those first nine years, and it will also save you taxes in those years. However, this can lead to a huge tax bill in that 10th year, and if you’re taking RMDs according to the Uniform Lifetime Table the entire balance must be distributed much earlier. (And if you need help finding a financial advisor to guide you through the process, This tool can connect you with up to three advisors that serve your area.)
A man considers rolling an inherited 401(k) into his IRA and then completing a Roth conversion.
Another option would be to convert some or all of the inherited 401(k) balance to a Roth IRA. This would eliminate the need for RMDs for the converted amount because Roth IRAs are not subject to RMDs.
However, it will subject the conversion amount to taxes during that year. This can benefit you if you are likely to be in a higher tax bracket later in retirement. Otherwise, it may not be worth the price.
You’ll likely be best off with the first or second option because they both allow you to spread those distributions over your lifetime. The primary difference is when to start those RMDs. If you transfer the assets to your account, they will be part of your RMD calculation for the year. If you keep assets in an inherited IRA, you can wait until the year your spouse turns 73 before taking RMDs. The required distribution amount will still be based on your age, but those extra tax-deferred years can be beneficial.
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Keep an emergency fund in case you incur unexpected expenses. An emergency fund should be liquid — in an account that isn’t exposed to significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be reduced by inflation. But a high-interest account allows you to earn compound interest. Compare the savings accounts of these banks.
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Matt Baker, CFP®, is a SmartAsset financial planning columnist and answers readers’ questions on personal finance and tax topics. Got a question you want answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Matt is not a participant in the SmartAsset AMP platform, nor is he an employee of SmartAsset, and has been compensated for this article.
