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of 70 ½, you may be allowed to continue withdrawing funds according to his or her withdrawal schedule. Your minimum annual withdrawal amount is based on your own life expectancy, according to IRS tables (see Appendix C in IRS Publication 590 at www.irs.gov). Alternatively, you could speed up the payment schedule or take a lump sum.
• You may also be able to transfer your balance into an "inherited IRA," which must be named and maintained separately from your other IRAs. With an inherited IRA, you must withdraw a certain amount each year, based on your life expectancy. Distributions must begin the year following the donor's death, regardless of whether or not you're retired.
• Make sure the 401(k) trustee transfers funds directly to the inherited IRA's trustee so you never touch the money; otherwise the transfer may be voided and you'll have to pay taxes on the entire sum that year.
• Surviving spouses have an additional option: Instead of opening an inherited IRA, they're also allowed to do a "spousal rollover," which means rolling over the balance into an existing or new IRA in their own name. The key advantage of a spousal rollover is that you don't have to begin taking mandatory withdrawals until you reach 70 ½, unlike inherited IRAs where you must begin withdrawals the year after the donor's death.
• One last point: Always withdraw at least the required minimum distribution (RMD) amount each year, if one is specified. If not, you'll pay a penalty equal to 50 percent of the difference between the RMD and what you actually withdrew.
• Bottom line: Talk to a financial or legal expert before taking any action on your inheritance.
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• Jason Alderman directs Visa's financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.
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