Q: My brother Kevin passed away in 2007 of Marfan syndrome, a genetic condition that affects the body's connective tissue. Kevin generously willed his 401(k) to my two children, who are 19 and 23. We were told that we have until 2012 to do something with this 401(k). With the market drop, the account lost a substantial amount of its value, and after inheritance taxes my kids could end up with far less than Kevin intended. I know that he would want the best for them and would be heartbroken if we did the wrong thing. So what's the right thing to do?

A: I want you to know it is going to be very easy to make the most out of Kevin's legacy. Thanks to a change in federal tax law that went into effect in 2007, any beneficiary of most 401(k), 403(b), or similar company-sponsored retirement plans can now inherit the money and roll it over into what's called an inherited IRA—a special type of IRA for just this purpose. (Previously only spouses could keep the tax advantages of an inherited retirement account.) There is no tax on the money that is rolled into the inherited IRA.

But there's one catch: The beneficiary must make annual withdrawals from the inherited IRA and pay tax on the withdrawn amount. The required minimum annual distribution is based on the beneficiary's life expectancy; because your kids are young, they will have to withdraw only small amounts each year, while the rest of their account can continue to grow, tax-deferred.

I would initially put all the money in a Treasury money market fund. You will want to keep some cash in the money market to cover annual withdrawals, but money the kids don't need for at least ten years belongs in stocks. Instead of moving this money over in one lump sum, divide it by 12, then transfer that amount each month into a dividend-paying exchange traded fund (ETF) or no-load stock mutual fund. Your kids have time on their side. I am confident that over the decades they will see big gains.

Here's a strategy to make even more of your brother's gift: Assuming your kids have jobs (even part-time), they are eligible to fund a Roth IRA. Individuals with income below $105,000 in 2009 can invest the maximum $5,000 a year (for married couples the income limit is $166,000). I would encourage the kids to take the annual withdrawals they are required to make, pay the tax, and then invest the remainder in a Roth IRA. There's no tax on the money while it is invested in the Roth, and if they wait until age 59Q to make withdrawals, their tax bills will be zero. We're putting Kevin's gift back to work building more financial security.

Suze Orman's most recent book is her 2009 Action Plan: Keeping Your Money Safe & Sound (Spiegel & Grau).

Please note: This is general information and is not intended to be legal advice. You should consult with your own financial advisor before making any major financial decisions, including investments or changes to your portfolio, and a qualified legal professional before executing any legal documents or taking any legal action. Harpo Productions, Inc., OWN: Oprah Winfrey Network, Discovery Communications LLC and their affiliated companies and entities are not responsible for any losses, damages or claims that may result from your financial or legal decisions.

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