Kevin McCormally: I am Kevin McCormally of Kiplingers, I am here with Mary Beth Franklin, the Senior Editor of Kiplingers Personal Finance magazine, to talk about inherited 401(k) s. Mary Beth, I know Congress made a big change to the law here. Starting this year, there is a new rule for inherited 401(k)s. What is it?
Mary Beth Franklin: Well, this is a great breakthrough. In the past, if someone died and left their 401(k) to a named beneficiary, only the spouse could take that money and roll it into her own IRA, anybody else whether it was kids, grandkids, siblings, whatever, they were forced to take distributions, and pay taxes on those distributions over five years.
Kevin McCormally: So what's the new rule?
Mary Beth Franklin: The new rule says, anybody who is a named beneficiary can take that money and roll it over into an inherited IRA.
Kevin McCormally: And then, what happens wit that money?
Mary Beth Franklin: It's huge, because that money gets to continue to grow over their lifetime, which could be 30, 40, 50 years, and they only have to take out a small portion each year based on their life expectancy. That means it stretches out the value, the balance of this account, and also keeps their tax bills very low.
Kevin McCormally: Now I know with the regular IRA, you don't have to take any money out until 70 and half. Does that rule apply here?
Mary Beth Franklin: No, here based on your life expectancies, since you have inherited this 401(k), which you have rolled over to an IRA, you take out a little piece each year based on your own life expectancy.
Kevin McCormally: Starting when?
Mary Beth Franklin: Starting within a year after inheriting.
Kevin McCormally: Thank you very much.
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