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Subject:  Re: When you retire or change jobs Date:  2/13/2006  2:32 PM
Author:  aj485 Number:  49917 of 90470

There is a major drawback to leaving the money in either the old or new companies 401K instead of rolling it out to an IRA. That is (as I understand it) that if you and you spouse should happened to both die (like in a car accident) then the 401K cannot be inherited by your kids without it being automatically distributed and taxed. An IRA can be inherited without normally being immediately taxed. This could result in greatly reducing your estate needlessly.

Actually the RMD for inherited an 401(k) is dependent on the provisions of the plan, so this is not true for all plans. Another factor is if the children are named primary or contingent beneficiaries of the 401(k) or if the 401(k) is forced to flow through the estate. There can be similar tax issues with IRAs if they are forced to flow through the estate because the children were not named primary or contingent beneficiaries, so I believe the issue you are referring to is dependent on whether or not beneficiaries are named rather than if it's a 401(k) or an IRA. So, name your beneficiaries, including contingent beneficiaries, on all retirement accounts/plans!

Personally, having recently inherited a 401(k) plan from my father, I can tell you that his plan allows RMDs based the lifetime expectancy of the beneficiary for no extra cost as long as the balance is over $5k. If the balance is less than $5k, I may be charged an annual 'small balance' fee, but until then, I can just take out and pay taxes on a percentage based on my life expectancy, which is similar treatment as if it had been an IRA.

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