Inheriting 401K from Sister
Dear Ms. Savage,
My sister and I inherited (50%/50%) our older sister’s Fidelity 401K. She passed away 12/23 and was 69. She was still working at the time. I was 67 and my younger sister was 56 at the time of her passing. From what I read, we can take a lumpsum distribution, roll it over into an IRA, or keep it in the 401K. When speaking with Fidelity, we were told we were required to do a rollover into a separate IRA and then do a lump sum distribution from that account. I am confused and not comfortable paying all those taxes. Regarding the 10 year rule – I am under the impression that we are required to withdrawal on an annual basis. Or completely withdraw everything by the 10th year. Because on our ages, do the rules apply to both my younger sister and me the same way? Or since I am 68 can I wait to begin withdrawing the funds?
I hope you can help me figure this out.
Thank you,
Ernest Vazquez
Terry Says
I can help! First, the company that employed your sister will require you to do a rollover to an inherited IRA — and Fidelity or Vanguard is a good place to start. In fact, you might each pick one of them, making it easier to keep your accounts separate in the future. They offer exactly the same opportunities and costs.
But you each need to contact the new custodian — Fidelity or Vanguard — and put them in touch with your employer’s HR department. They will divide the account in half — and put it all in cash, and move it per your directions.
THERE IS NO TAX INVOLVED IN THIS ROLLOVER!!!
Once at the new custodian, you’ll be asked how you want to invest your inherited IRA. At your ages, I’d suggest a mix of conservative stock funds and a very short term government bond fund and a money market account. You dont need to pay for advice on making this investment!
Since your sister had not been taking RMDs, you are not required to take an immediate RMD.
BUT each of you, for your own inherited IRA account, must withdraw the entire balance of the participant’s inherited IRA account by the end of the 10th year following the original owner’s death.
There will be no penalty even though your younger sister is under age 59-1/2 — BUT you must pay ordianry income taxes on the withdrawals.
