[quote=bearishgurl]Many of our “greatest-generation” and “depression-era” parents had their retirement funds tied up in 401K or 403(b)-type vehicles and died too young or without sufficient notice to move it all out of there while they were alive, well and eligible. Therefore, if their baby-boomer children inherit these funds and are under age 59-1/2, the funds can only be moved over to the heirs’ SSN WITHOUT WITHDRAWALS until they are age-eligible, unless they are willing to pay a 20% penalty for early withdrawal.
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I apologize for the hijack but I need to correct this.
If the parent had started collecting on their 401k/IRA funds then the child does NOT have to cash out and there is NO 20% penalty. I know this from first hand experience. As mentioned previously, my parents have both passed and I inherited a small amount from them. The bulk was in IRA/401k money.
The adult child beneficiary has a “required minimum distribution” (RMD) that is based on the CHILD’s age and must withdraw that amount each year. They pay NORMAL income tax on it, no penalty. They CAN withdraw the entire amount – but that would mean they have to pay taxes on the entire amount (typically a higher rate than just adding the RMD to other sources of income) and they’d lose the tax deferred status of any money withdrawn.
The 20% penalty is NOT there for inherited tax deferred retirement funds. It is like an IRA that you can withdraw and pay normal income taxes – just doing it before you are 59.5.
If the beneficiary is the wife of the deceased the rules are a bit different. I only did the research on the adult child beneficiary case since that’s the one that applied to me.
Too many people cash out inherited IRAs without considering the tax advantage of keeping it tax deferred.
Google “inherited IRA” and you’ll find the details, calculators for determining the RMD each year, etc.
I hope this info helps someone avoid costly misunderstandings.
End hijack.
