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Inheriting A 401k...Here's An Update For A Non-Spouse

One of the major features of the new Pension Protection Act allows a "non-spouse" beneficiary to roll over an inherited 401k or 403b plan into an IRA account.   This change to employer plans allows children, partners, (any non-spouse) to move money into an IRA and stretch-out deferrals over their life expectancy.  In the past they were generally required to take the money out within 5 years, (much sooner in some plans) exposing that inherited plan to a large tax bill.   Imagine working all your life and having your nest egg go to a child with immediate taxes- not very fair.

Just one small glitch.  Not every plan has adopted these new rules- so your 401k or 403b may not have this in place.  Apparently this non-spouse rollover provison is discretionary and many plans just have not adopted this.

Forbes provides an update on non-spouse rules.

There's another gotcha in the IRS guidance for non-spouses who inherited a 401(k) account before 2006. The wording of the new law led planners to believe, reasonably, that non-spouses who had inherited a 401(k) before Jan. 1, 2006, would be allowed to roll over any money left in the account after Jan. 1 and stretch out the payments. But the IRS saw things differently.

If the death occurred in 2002, nothing can be transferred into an IRA (because of arcane minimum distribution rules). If the death occurred in 2006 or later, the rollover with its stretched-out payments is available. Here's where the IRS's interpretation of the law gets really crazy. For taxpayers who inherited 401(k) accounts between 2003 and 2005, the new rules let them roll the money left in the 401(k) account into an IRA, but they then have to take all the cash out within five years of the original 401(k) owner's death.

Meanwhile, if you're leaving your 401(k) to anyone other than a spouse, call your company's personnel department to insist it amends the plan to allow non-spouse rollovers. And if you've got an old 401(k) sitting at an ex-employer, do your heirs a favor and roll it into an IRA before you die, to avoid any complications.


Posted on Wednesday, February 7 by Registered CommenterWise Owl | Comments Off