Just Inherited Moms 401K Through Her Employer

Submitted by SHANNON MORELAND on Thu, 2017-04-06 15:06

My mom a very loving hard working woman passed at age 61. She left me age 42 and my brother age 40 her 401k from her job. The amount was 27k. Can someone provide some advice on what we should do with the money to avoid stiff tax penalties. I have spoke with Edward Jones and there are some fees to take in account and Vanguard who states there is no fees until we use their investment management services. I appreciate your time providing guidance in this matter.

Thank You in Advance,
Shannon



Submitted by Alan - IRA critic on Thu, 2017-04-06 15:55

  • Sorry to hear of your loss. An inherited account is essentially no different than your own retirement account when it comes to selecting an IRA custodian. Do you have a custodian now that you are looking to change? 
  • If you are not ready to make a decision now regarding the custodian, you still need to file a death certificate and other data such as name, address, your successor beneficiary and your SSN to the plan.
  • If your mother passed this year, your first RMD as beneficiary will be due no later than 12/31/2018. If you both request direct rollovers to individual inherited IRAs before that date, then you can each use your own age to determine your annual RMDs. If your mother passed last year, the above date will be one year sooner. Most people would do the direct rollover to an inherited traditional IRA, you also have the option to transfer it to an inherited Roth IRA, but taxes would be due for a Roth transfer.
  • The only penalty you would be exposed to after the transfer to an inherited IRA would be for failing to take out your annual RMD. Your annual RMD would be very small ( a little over $300), but you can also withdraw more than your RMD anytime you want. If you are working and not maxing out your retirement plan contributions, some people will draw out more than their RMD and use that money to increase their contributions to their own retirement plan. The tax and tax deduction would offset each other, but you would essentially be moving funds from an account that has RMDs every year to one that RMDs will not start until age 70.5.
  • Whether you need to pay the extra fees that EJ would charge on an on going basis to be your IRA custodian or whether all you need is the more basic assistance you could get at Vanguard, Schwab, or Fidelity cannot be determined here because there are several factors involved. Either custodian could assist with the direct rollover process from the 401k plan.

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