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The passing of a loved one is a life-changing event. With those changes comes the passing of assets in the form of personal items, real estate, business holding and retirement accounts. Baby boomers, who were born between 1946 to 1964, are projected to leave the next generation $30 trillion to $70 trillion over the next two decades.

What is one to do with this substantial inheritance? Well, that depends on whom the person inherited these assets from. Let’s take a quick dive into inherited retirement assets.


Before we take a look at what those options are, you should know that the CARES Act, which was signed into law on March 27th, 2020, changed the way retirement assets are passed down. Going forward, these are the options certain individuals will have when inheriting assets if the account owner passes on or after January 1st, 2021.

· Spouse

o Individual Retirement Account (IRA) – If the surviving spouse is under 72, he or she can delay required minimum distributions (RMDs) until age 72. Additionally, if the spouse does not intend to take a distribution from the inherited assets, he or she can then move the assets into a 401(k) plan to gain protections from creditors and possibly borrow from the plan if allowed. Additionally, that spouse can convert those assets into a Roth IRA over an extended period of time, which is often done to create future tax-free distributions.


o Inherited IRA – This option is used less often, but it does allow the spouse to access the assets without the 10% penalty. As the surviving spouse moves money into an inherited IRA, they may experience downsides, such as needing to take the remaining balance via RMDs based on their age. Additionally, he or she cannot commingle those assets with their own IRA, 401(k)/403(b), or tax- deferred retirement account


· Non-spouse


o This designation falls to any person who is not the account owner’s legal spouse. For instance, they can be children, grandchildren, nephews, or family friends. A non-spouse beneficiary has up to 10 years to distribute the account balance. As mentioned above, these rules apply to accounts inherited after January 1st, 2021.


Some may argue that the beneficiary should keep the retirement assets invested and take 1/10 of the account value to create maximum tax efficiency. Others might argue that adjusting the distribution amount every year to keep the beneficiary’s marginal tax bracket down may be a better solution. A few may propose what one of our client’s did–take 1/10 of the account value over 10 years, while increasing the 401(k) contributions in the same amount over the next decade. Every individual has different needs, but regardless, the IRS will only allow a maximum of 10 years to liquidate the account.


o Although this option is not used often, the beneficiary can distribute all the assets at once. However, those assets could push the individual’s marginal tax up the bracket since the distribution is treated as income, so it is not as tax-efficient. Let’s say that an individual makes $50,000 and distributes $120,000 in retirement assets. They would be moving from a 22% to a 32% marginal tax bracket. Assuming no growth, that same individual who is splitting the same inheritance over a 10-year period would remain in the same marginal tax bracket based on current law.


· Non-spouse exemption


o Minor children of the account owner, an individual with a chronic illness or disability, and any individual who is less than 10 years younger than the original account owner are exempt. These individuals need to take RMDs based on their life expectancy.


· Entities/non-individuals


o What do an estate, trust, and charity have in common? They are all entities. When inheriting retirement assets, the IRS allows for a 5-year liquidation period of entities. Keep in mind that certain types of trusts may offer favorable tax treatments.


As the basic requirements of an IRA/401(k)/SEP or qualified retirement account, these rules also apply to Roth IRA and Roth 401(k)s. However, those assets can be distributed without future tax dues (if distributed correctly). Regardless of the action you decide to take, please consult with your financial, tax and legal professional. Sun Valley Financial is here to help with any questions you may have. Until next time!