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Income Tax Burdens for the Non-Spouse Beneficiary: Perils of Failing to Roll a 401k into an IRA Edmonds WA

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.

Jim Black
16310 NE 80th St
Redmond, WA
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Company: Absolute Return Solutions
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401k Rollover From Employer,Income for Life/ Preserve Principal,Alternative Investments,Retirement Planning,Investment Consulting & Allocation Design,Insurance & Risk Management Planning,Retirement Income Distribution Planning,Individual Income Tax Planning,Pension for Highly Compensated Owners,Stock Market Alternative,Wealth Management,Annuities,Alternative Asset Class Planning,Business Succession & Liquidation Planning,Estate Tax Planning,Business Income Tax Planning,Fee-Only Comprehensive Fin

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Mr. Perry L. Smith (RFC®), CHFC, CLU
(425) 462-2072
800 Bellevue Way N.E. #400
Bellevue, WA
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Perry L. Smith Consulting, LLC
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Education: Gonzaga U 1968-1970Eastern Wash U 1970-1972-BA American College-CLU-1982American College-ChFC-1989 NASD S7,S63,S24 - 1985RFC -1985Real Estate 1990Wealth Preservation Institute-CWAP & CAPP-2006 Golden Gate University -GGU - MS (Tax)
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Hochberg William D
(425) 744-1220
222 3rd Ave N
Edmonds, WA
 
Conley James A
(425) 672-7150
120 W Dayton St
Edmonds, WA
 
William D. Hochberg
(425) 744-1220
1445 10th Pl N
Edmonds, WA
 
Mr. Warren B. Stickney (RFC®), LUTCF
(425) 462-6335
2050 112 Ave., NE 210
Bellevue, WA
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Stickney Research
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Neal Broidy, MBA
10900 NE 8th Street
Bellevue, WA
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(425) 743-2336
5014 150th Pl SW
Edmonds, WA

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Johanson Jim
(425) 776-5547
7009 212th St Sw Ste 202
Edmonds, WA
 
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Edmonds, WA
 
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Income Tax Burdens for the Non-Spouse Beneficiary: Perils of Failing to Roll a 401k into an IRA

Provided By: 

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.
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Top IRA expert and author of Retire Secure !, James Lan...

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