To help mitigate the tax consequences of inheriting a potentially large pre-tax retirement account, the Internal Revenue Code permits spouses to roll an inherited retirement account over to his/her own IRA. Meanwhile, other non-spouse beneficiaries are permitted to at least stretch distributions out over their life expectancies as well.

The favorable rules for a so-called stretch IRA, however, do not automatically apply to all inherited retirement accounts. In the case of an inherited employer retirement plan, such as an inherited 401(k) or inherited 403(b) account, the employer has the option to force non-spouse beneficiaries to use the far-less-favorable 5-year rule instead, compelling the entire account to be liquidated by the end of the 5th year after death.

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