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Author: GromitJS Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75402  
Subject: IMPORTANT NEW 401(k) TAX LAW- HEIRS Date: 8/19/2006 4:44 PM
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A very important tax law change was included in the new pension law signed by the President.

http://www.latimes.com/news/printedition/front/la-fi-pension18aug18,1,7232289.story?coll=la-headlines-frontpage

... it also covers an array of other matters, including the rules affecting the transfer of 401(k) accounts and other so-called defined-contribution plans, upon death.

Federal law has always allowed a spouse who inherits a 401(k) account to put the money into his or her own retirement savings account without penalty. But anyone else — including a child of the deceased — typically has been required to withdraw all funds from the account and pay taxes on the income within a matter of months. Such an inheritance also has forced some survivors into a higher tax bracket, further increasing their tax burden.

Under the new provision, other heirs besides spouses will be able to roll an inherited 401(k) account into an individual retirement account and not pay taxes on the income immediately, perhaps not for many years. A non-spouse heir's tax payment schedule will be tied to the age of the account's former owner....


Folks this is a HUGE tax savings. From my experience most companies require non-spouse 401(k) beneficiaries to withdraw the money in a lump-sum payment... if the 401(k) has a big balance to it, the non-spouse beneficiary ends up getting pushed into a high tax bracket just for that year. This was always a major difference between 401(k) and IRA non-spouse beneficiaries.
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Author: Illinikeith98 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 53285 of 75402
Subject: Re: IMPORTANT NEW 401(k) TAX LAW- HEIRS Date: 8/22/2006 4:39 PM
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A good friend's father passed away last year (May 2005) and he has yet to do anything with the 401k account he and his brother inherited. Is he the victim of bad timing here, because the article in Yahoo Finance says this new law takes effect in 2007, and I think you have to make a withdrawl of the full amount of the 401k account the year following the death.

Any advice or knowledge on this scenario would be much appreciated!!

Best Regards,

Foolish Illinikeith98

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Author: GromitJS Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 53413 of 75402
Subject: Re: IMPORTANT NEW 401(k) TAX LAW- HEIRS Date: 8/29/2006 9:01 PM
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Issue #1- When must distribution occur:
A non-spouse inherited 401(k) must be withdrawn within 5 years from the deceased date of death. HOWEVER, each 401(k) plan is written uniquely and the 5 year rule is simply the maximum allowed time before distribution must occur... an employer can write their plan, and many do, which requires that a non-spouse beneficiary take full distribution of a 401k within a matter of months/days. It is VERY important to contact the trustee of the 401k and ask them directly how their particular plan has been written in regards to distribution rules for non-spouse beneficiaries.

Issue #2 Does the new law impact accounts inherited prior to 2007:
Good question!... I've looked at the actual new law and to me it's just not clear what is the correct interpretation. Most likely congress/treasury will need to issue a TCM (Technical Corrections Memorandum) which hopefully will clarify this exact factual situation. I contacted a Fidelity 401(k) specialist and he said, "hmmmmm, good question?". He just called me back today and said that Fidelity lawyers are definitely interested in getting a clarfication from congress/treasury before advising their clients what is allowable. Most likely it will take a few months before anything is published concerning this issue.

Gromit

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Author: Illinikeith98 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 53488 of 75402
Subject: Re: IMPORTANT NEW 401(k) TAX LAW- HEIRS Date: 9/3/2006 4:32 PM
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Thanks Gromit, I appreciate you taking the time to respond. Funny how you called Fidelity and got that answer, word has not spread very quickly concerning this new law, since 3 financial specialists he spoke with had no clue about it either...

Illinikeith98

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