| The recent Pension Protection Act 401(k) - | | | | tax-deferred, and could be worth $1M or more |
| Rollover Information on what the new law | | | | over time for the non-spouse heir. |
| offers. | | | | Therefore, the best tax advice used to be |
| | | | "roll the money into an IRA." The Roll The |
| The recent Pension Protection Act offers good | | | | Money Into An IRA Problem The reason people |
| news for the non-spouse beneficiary of a | | | | resisted the advice and rolling the 401(k) |
| 401(k). It is now possible to arrange a | | | | into an IRA is that many of these old 401(k) |
| trustee-to-trustee transfer of an inherited | | | | plans have a great fixed income fund as one |
| 401(k) to an inherited IRA. This is great | | | | of their components. Many of these old fixed |
| news for the consumer, and represents a | | | | income funds are paying returns in excess of |
| significant change from the old law. The new | | | | today's fixed income or bond funds and many |
| law basically offers inherited 401(k)s the | | | | of the old timers continue to have money in |
| same tax treatment as inherited IRAs. The | | | | these fixed income funds of their 401(k) 10 |
| 401(k) owner should now make the decision to | | | | years or more after they retire. The old law |
| rollover or not to rollover based on | | | | forced a choice between offering the |
| investment reasons, not tax reasons. 401(k) | | | | non-spouse heir the tax benefits of the |
| Rollover Distribution Background Under the | | | | stretch IRA and the owner's interest in |
| old tax laws, leaving money in a 401(k) to an | | | | keeping the money in the better-than-average |
| heir other than your spouse carried the | | | | fixed income fund in the 401(k). Maybe some |
| potential for a tax nightmare. Rules | | | | hotshot investor could show me a much better |
| governing 401(k)s vary according to a | | | | investment than these old funds, but with my |
| particular company's plan documents. Often | | | | experience, I would rather have money in many |
| plan documents stipulated that if you left | | | | of these fixed income funds (including TIAA |
| your 401(k) to an heir, other than your | | | | for the 403(b) crowd) than other bond or |
| spouse, he or she would have to take | | | | fixed income funds. The New Law and My |
| distribution of the inherited 401(k) and pay | | | | Solution: Make the Best of Both Options I am |
| income taxes on the entire distribution the | | | | still in favor of managed money if you find a |
| year after the death of the original owner. | | | | low fee, ethical advisor with a great track |
| | | | record. Now, however, I would likely |
| On a $1M inherited 401(k) this would mean | | | | recommend retaining the fixed income portion |
| paying $350,000 in taxes immediately, and the | | | | of the portfolio in the 401(k). The stock and |
| remaining $650,000 would be outside of the | | | | growth portion of the 401(k) could be rolled |
| tax-deferred environment. Inherited IRAs did | | | | into an IRA to take advantage of the broader |
| not have that limitation. An heir with a $1M | | | | spectrum of investment options offered |
| inherited IRA could take the necessary | | | | through IRAs. In either case the non-spouse |
| minimum required distributions and maintain | | | | heir will not have to worry about the tax |
| the money in the tax-deferred | | | | consequences if he or she is lucky enough to |
| environment-stretching the IRA's life. And | | | | inherit either the IRA or the 401(k). |
| the "stretch IRA" would continue to grow | | | | |