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)

RELATED FAQS

  1. How does a defined benefit pension plan differ from a defined contribution plan?

    Learn the differences between defined benefit plans and defined contribution plans when reviewing employer-sponsored qualified ...
  2. What are the best ways to pay off my mortgage quickly?

    Learn how mortgage payments may be reduced and how to save thousands on mortgage loans by lowering the interest and principle ...
  3. What happened to Bernard Baruch's estate after his death?

    Learn what became of financier Bernard Baruch's multimillion dollar estate upon his death in 1965, and learn about his philanthropic ...
  4. What are the differences between a revocable trust and a will?

    Investigate the choice between a revocable trust and a traditional will and how their unique advantages can match asset management ...
RELATED TERMS
  1. Self Invested Personal Pension (SIPP)

    A tax-efficient retirement savings account available in Great ...
  2. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  3. Gold IRA

    Definition of Gold IRA
  4. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...
  5. Leveraged Benefits

    The use – by a business owner or professional practitioner – ...
  6. Peri-Retirement

    A term for the period of time leading up to actual retirement. ...

You May Also Like

Related Articles
  1. Professionals

    Who Wants to be a 401(k) Millionaire?

  2. Professionals

    Are Longevity Annuities in 401(k)s a ...

  3. Mutual Funds & ETFs

    4 Tax-Free Muni Bond ETFs to Consider

  4. Mutual Funds & ETFs

    Greedy on the Dollar? See This Leveraged ...

  5. Trading Strategies

    American Express: Headwinds and Tailwinds

Trading Center