Your Questions Answered - Can You Stretch a 401(k)?
A reader recently asked if his 401(k) could be rolled over, by his beneficiary, to a 'stretch' IRA after his death. Read on to discover an answer that will protect your beneficiaries from tens of thousands of dollars in unnecessary taxes and keep your gift to them alive for generations to come. “Guarding Your Wealth” is a nationally syndicated weekly personal finance column written by Jeffrey D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group, a private wealth management firm that employs sophisticated proprietary strategies designed to protect and grow its clients' investments. Please visit our website, www.guardingyourwealth.com to read past articles in our archive.
(PRWEB) March 14, 2005 -- A reader recently asked if his 401(k) could be
rolled over, by his beneficiary, to a 'stretch' IRA after his death. Read on to
discover an answer that will protect your beneficiaries from tens of thousands
of dollars in unnecessary taxes and keep your gift to them alive for generations
to come.
Whether or not your beneficiary can rollover your 401(k) at
your death (and subsequently stretch it) depends on who your beneficiary is and
the terms associated with your company plan. Basically, you usually can’t
stretch a 401(k) account directly, but if that money is rolled into an IRA, you
can. This is a situation where the details matter.
Let's assume for the
sake of illustration that you have a wife and 3 children. If your spouse is the
beneficiary, she can roll the money from your 401(k) to her own IRA. Assuming
that she has named the 3 children as beneficiaries of her IRA, they would have
the ability to stretch it at her death. (‘Stretching’ an IRA refers to the
ability for a beneficiary to take distributions based on their life expectancy
instead of all at once.)
Ideally, she would divide the money into 3 IRAs
and name one child as the beneficiary for each one. That allows each child to
stretch the IRA over their life expectancy. If the 3 children are the
beneficiaries of 1 IRA then it would be stretched based on the oldest
beneficiary’s life expectancy.
On the other hand, if your children are
the beneficiaries of your 401(k) plan they may or may not be able to stretch it.
Let me explain. The tax laws allow for beneficiaries to stretch out
distributions, but most company retirement plans do not permit it. The reason is
simple--the stretch can take place over decades.
If the company allowed
that, then they would be responsible for all the administration. There isn't any
benefit to the company to do so while it exposes them to potential liability.
Instead, most company plans will cash out the beneficiaries at the death of the
employee. At best, the beneficiaries may be able to stretch it out over 5
years.
Realize what this means. Let's say you have $600,000 in your
401(k). If your wife is the beneficiary, she can roll it to her own IRA and then
when she dies, the children can stretch it. If a child is in their 50’s, that
means that taxes can continue to be deferred (except for the annual required
distribution) for almost 30 years. $200,000 can literally grow to millions of
dollars over 30 years.
If those children were the beneficiaries of your
401(k) instead and were cashed out at your death, they would not have the
ability to roll that money to an IRA. They would have to pay taxes on all of
that money in the year it was distributed. In our example, each of your three
children would have to claim $200,000 in ordinary income that year! This would
bump each child’s tax bracket and could result in 35% of it being lost in taxes.
That’s a tax bill of $70,000 each, or a total of $210,000 in taxes on your
$600,000 nest egg.
Even if you have your wife as the primary beneficiary
of your 401(k) and your children as the contingent beneficiaries, you are
opening up the possibility of the children not being able to stretch
distributions. If your wife passes away before you, or you both die in an
accident, the 401(k) money would go to the children and most likely be
distributed immediately.
There really aren't any benefits to keeping your
retirement money in a 401(k) after you retire, but several big disadvantages.
All of this is easily avoided by simply rolling that money to your own IRA. Your
investment options will be much greater, and so will your flexibility and
control.
I love to personally answer readers’ questions. If you’d like
free, unbiased advice send your questions to e-mail protected from spam bots.
Read answers to questions other readers have asked on the Q&A page at www.guardingyourwealth.com.
Mr. Voudrie is a Certified
Financial Planner, nationally syndicated newspaper columnist and President of
Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City,
TN. He can be reached toll-free at 1-877-827-1463 or at e-mail protected from
spam bots.
[For more Free Financial Advice and information about
'stretch' IRA's read ‘How To Stretch Your IRA - Tax Free’ and ‘Q&A:
Stretching An IRA’ in our Article Repository at www.guardingyourwealth.com]
Looking for an energetic
expert who is passionate about financial and wealth management? Mr. Voudrie is
an excellent speaker who will excite and inspire your audience. Mr. Voudrie is
available for a limited number of speaking engagements, television appearances
and radio talk shows. For booking information, contact Christine Withey at (877)
827-1463 or email e-mail protected from spam bots.
Related Articles can
be found at www.guardingyourwealth.com under the Guarding Your Wealth
Article Archive:
Getting The Most Out of Your 401(k)
How To Stretch
Your IRA – Tax Free
Q&A: Stretching An IRA
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Source : http://www.prweb.com/releases/2005/3/prweb217164.htm