Financial Planning Advice: 401(k) Rollover Information Your Financial Planner Might Not Want to Tell

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