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I spoke with Fidelity today about my 401K and the pro-rata rule and, again, they verified you all were right on the money when you said if I rolled my 401K into an IRA I couldn't do the back-door ROTH conversions anymore. Since I already did one for this year, I can’t roll until next year at the earliest without messing that all up.

The guy on the phone brought up another interesting point. He said on most 401Ks or IRAs there is a 5-year rule if the owner of such dies – in that the beneficiary of said IRA/401K has five years in which to move the entire thing into an “Inherited IRA” or they’ll be forced to distribute the entire thing (kicking off a load of taxes) and send the proceeds to the beneficiary.

He also said there are issues now if you have a Living Trust and your Trust inherits your IRA rather than a human being. Taxes are much higher and there are other issues. He told me to google Look Through or See Through Trust along with 401K. I think our IRA’s currently go to spouse and then trust. If we died at the same time, it would be a big issue as we have a lot in 401K’s.

New topics. Discuss amongst yourselves... :)

Cross posting to Estate Planning board...
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He also said there are issues now if you have a Living Trust and your Trust inherits your IRA rather than a human being. Taxes are much higher and there are other issues.

He's right WRT it being a bad idea to leave an IRA or 401k to a Trust instead of named beneficiary(ies). I think the big "penalty" is the Trust will have to take the entire amount within a 5 year period.

Named beneficiary(ies) can normally take distributions based on their life expectancy (thereby (hopefully) allowing the principal to continue to grow/earn/pay dividends over a longer period of time on a tax deferred/free basis). There may be other tax issues (aside from large distributions pushing one into a higher tax bracket) too with the Trust as beneficiary, I'm not clear on that.

Hopefully others have information or can clarify additional issues. I suggest you name individuals as beneficiary(ies) of the 401k/IRA. AND, see an Estate Planning Attorney. If a minor(s) it can probably be set up for distributions go into a trust for the minor. At least you protect the "stretchability" of 401k/IRA.

Some of this is covered in IRS Pub 590. See Beneficiary not an individual, pg 37
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I think our IRA’s currently go to spouse and then trust. If we died at the same time, it would be a big issue as we have a lot in 401K’s.


You have the option of setting up contingent benficiaries in case the primary beneficiary is deceased.
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I think our IRA’s currently go to spouse

If they don't, it is likely the spouse had to sign away the right to be the primary beneficiary. This is also true with 401ks. In any event, it should be a great nudge to review all your beneficiaries.

it would be a big issue as we have a lot in 401K’s.

If this is the case, it's time to review your estate planning with a professional. Also, everything called a "trust" doesn't work the same way.
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He's right WRT it being a bad idea to leave an IRA or 401k to a Trust instead of named beneficiary(ies). I think the big "penalty" is the Trust will have to take the entire amount within a 5 year period.

Not necessarily, because...

Also, everything called a "trust" doesn't work the same way.

What she said.

-synchronicity
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I had a professional set this up to begin with. Probably 6 years ago. Cost a pretty penny, too. Has something changed in 7 years?

At the time, she said everything was either joint or 1. Spouse first 2. Living trust second. Then someone is guardian to the kids and the bank or somebody doles out living expenses every year.

So I have a spouse and 2 kids who are 17. If we can all live just two more years, I'll revamp the whole will since the kids will no longer be minors...
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