Income Tax Burdens for the Non-Spouse Beneficiary: Perils of Failing to Roll a 401k into an IRA Bardstown KY
Company: Cornerstone Wealth Management
Investment Advisor Rep: Yes
University of Kentucky
Bachelor of Arts in Education
Bachelor of Business Administration
Disability Insurance,Retirement Planning,Real Estate Investment Planning,Commission-Only Financial Planning (Full Disclosure),Insurance & Risk Management Planning,Retirement Income Accumulation Planning,Business Income Tax Planning,Fee-Only Comprehensive Financial Planning,Fee Only Portfolio Management,Wealth Engineering,IRA, 401k, Roth IRA, QDRO Rollovers,CD Alternative,Medicaid,Annuities,Alternative Asset Class Planning,Investment Consulting & Allocation Design,Business Succession & Liquidatio
Millard Advisory Group
Education: Bachelor of ScienceMaster of Business AdministrationFinanceTax
Years of Experience: 13
Invoice, Pension Planning, Retirement Planning, Tax Planning, Tax Returns, Seminars Work, Employee Benefits, Annuities, Life Insurance, Disability Income Insurance, Long Term Care Insurance, Medical Insurance, Group Insurance, Healthcare Accounts, Asset Protection, Compensation Plans
Company: C Risher Financial, LLC
Investment Advisor Rep: Yes
Registered Investor: Yes
Years Experience: 10
Wealth Engineering,401k Rollover From Employer,Income for Life/ Preserve Principal,Alternative Investments,Life Insurance,Investment & Portfolio Management,Investment Consulting & Allocation Design,Business Succession & Liquidation Planning,Estate Tax Planning,Asset Protection Strategies & Planning,Fee-Only Comprehensive Financial Planning,Portfolio Engineering,Pension for Highly Compensated Owners,Stock Market Alternative,Wealth Management,Health Care Insurance,Retirement Planning,Long-Term Hea
Financial Concepts, Inc.
Years of Experience: 8
Invoice, Business Planning, Portfolio Management, Retirement Planning, Tax Planning, Tax Returns, Mutual Funds, Annuities, Life Insurance, Long Term Care Insurance, Business Coach, Education Plan
Income Tax Burdens for the Non-Spouse Beneficiary: Perils of Failing to Roll a 401k into an IRA
Money, Taxes & Small Business
|Income Tax Burdens For the Non-Spouse Beneficiary: Perils of Failing to Roll a 401k into an IRA |
By James Lange
Have you heard about a stretch IRA and wondered if it was some special kind of IRA? Well, it isn t. In the simplest terms, a stretch IRA is an IRA that has a beneficiary designation that provides for the possibility of maintaining the tax deferred status of the IRA after the death of the IRA owner. You might be thinking, I wish I had a stretch IRA. I only named my spouse as my primary beneficiary and my kids as my successor or contingent beneficiary. Well, guess what? You have a stretch IRA. After your death, your spouse and/or your children could continue to defer income taxes for many years after your death, as long as they are prudent and only take the annual minimum required distributions mandated by law.
While the stretch concept applies to some retirement plans, many heirs of 401k owners could be in for a rude awakening if their parents fail to plan properly.
With proper planning you can put in place the mechanisms to stretch taxable distributions from an inherited IRA and certain retirement plans for decades, sometimes as long as 80 years after the original owner dies. If, however, the employer s retirement plan document stipulates the wrong provisions, the stretch may be replaced by a screaming income tax disaster. The heirs could be in for a tax nightmare if Dad never transferred his retirement plan into an IRA.
Many investors fail to realize that the specific plan rules that govern their individual 401k or other retirement plan take precedence over the IRS distribution rules for inherited IRAs or retirement plans.
The distribution rules that come into play at the death of the retirement plan owner are usually found in a plan document that few employees or advisors ever read. Many, if not most plan documents say that in the event of death, a non-spouse beneficiary must receive (and pay tax on) the entire balance of the retirement plan the year after the death of the retirement plan owner. These retirement plans don t allow a non-spouse beneficiary to stretch distributions. For example, if there is a $1 million balance, the non-spouse heir or heirs will have to pay income taxes on $1 million. Then, the remaining balance, roughly $650,000 ($1 million minus the $350,000 immediate income tax hit) would be outside of the tax-deferred protection of an inherited IRA.
Had the 401k participants taken that money and transferred it into an IRA before he died, the non-spouse beneficiary would have been able to stretch the distributions based on his or her life expectancy. Failing to make the IRA transfer will result in an unnecessary massive income tax burden for the non-spouse beneficiary.
Top IRA expert and author of Retire Secure !, James Lan...