Tue Jul 30 2024, by Tyler Gardner

Essential Guide to Navigating Your Inherited IRA and 401(k)

If you have recently inherited an IRA or a 401(k) and have no clue what to do now, here are the five things you need to know.

I'm Tyler, a former financial advisor and portfolio manager, and now I make financial content for free so that you don't have to pay for it.

1. Withdrawal Timeline for Inherited IRAs

In 2019, Congress passed a law that mandates inherited IRAs must be withdrawn within 10 years of the person’s death. However, the law did not specify whether the money had to be taken out every year or if it could be waited on until the end of 10 years.

2. Required Minimum Distributions (RMDs)

If the deceased was already taking required minimum distributions, the inheritor must start taking withdrawals the year after death. These distributions are based on the inheritor’s life expectancy.

3. Flexibility in Withdrawals

If the deceased was not taking RMDs, you can choose to take the money out any time over the next 10 years. Be cautious, though: taking it out in one lump sum at the end of the decade can trigger a larger tax event from a pre-tax account.

4. Penalty for Missing Withdrawals

The penalty for missing a withdrawal is 25% of what should have been taken out that year. Fortunately, this penalty will not apply to anyone who missed withdrawals from 2021 to 2024 due to confusion, as long as they start taking withdrawals in 2025.

5. Inheriting a Roth IRA

If you inherited a Roth IRA, you do not have to take annual distributions and can wait to take all of that money out in year 10. Since it's a Roth funded with post-tax dollars, you will not trigger a tax event like you would with a traditional IRA.

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