Lump Sum Payments Can Cost Heirs of Retirement Accounts

08/22/2016

When retirement accounts are passed on to heirs they face major decisions that have to be made in a timely manner.

Market Watch recently discussed some typical options that are important to spouses that inherit retirement accounts in "Inheriting a retirement account? Lump sum payouts can be costly."

They include:

  • Lump Sum Cash Payment - The surviving spouse has the option of cashing out the account with a single lump sum payment. This is the most costly option in terms of taxation.
  • Monthly Benefits - Most plans allow a surviving spouse to receive a monthly benefit for life. Whether this is a better option than taking a lump sum depends on the life expectancy of the surviving spouse. It is also a good choice if the surviving spouse does not want to invest the money.
  • IRA - A surviving spouse can normally transfer the account assets into an IRA. The assets will then be treated as if they were always the property of the surviving spouse.
  • Inherited IRA - Transferring into an inherited IRA is another option available to a surviving spouse. This is can be very beneficial if the surviving spouse is much younger than the pensioner.

An estate planning attorney can guide you in your options.

Reference: Market Watch (July 25, 2016) "Inheriting a retirement account? Lump sum payouts can be costly."