I've heard that workers who don't roll over their 401(k)s after retiring face some problems related to estate planning. I was told it was some type of final 2002 government regulation. Is this true?

By Denise Appleby AAA
A:

I am not sure to which government regulation your contact was referring. However, here is what I can tell you. In 2002, the IRS issued final required minimum distribution (RMD) regulations affecting the options available to beneficiaries of retirement plan assets. Generally, the effect of these RMD regulations on estate tax is the same whether the retirement assets are in a 401(k) plan (or any other qualified plan) or in an IRA at the time of the retirement account owner's death. Because you asked specifically about 401(k) plans, I'll focus on those.

For 401(k) plans, most individuals find it beneficial to designate the spouse as the primary beneficiary, because if the plan requires an immediate distribution by the beneficiary (instead of the life expectancy options where a portion is distributed each year), the spouse has the option of rolling over the inherited assets to an IRA. Non-spouse beneficiaries are not allowed to roll over inherited assets from 401(k)s and other qualified plans. Rolling the assets to an IRA allows the spouse to defer beginning distribution until he or she reaches age 70 ½, and it allows him or her to designate beneficiaries for the assets, possibly resulting in a prolonged life for the retirement account/assets.

Designating the spouse as the beneficiary for either qualified plans (such as 401[k]s) or IRAs may allow the spouse to receive unlimited estate tax marital deduction for the inherited assets. However, the amount may be included in the spouse's estate at the time of his or her death.


This question was answered by Denise Appleby
(Contact Denise)

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