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Income Tax Burdens For the Non-Spouse Beneficiary: Perils of Failing to Roll a 401k into an IRA

Have you heard about a "stretch IRA" and plans.
wondered if it was some special kind of
IRA? Well, it isn't. In the simplest The distribution rules that come into
terms, a stretch IRA is an IRA that has a play at the death of the retirement plan
beneficiary designation that provides for owner are usually found in a plan
the possibility of maintaining the tax document that few employees or advisors
deferred status of the IRA after the ever read. Many, if not most plan
death of the IRA owner. You might be documents say that in the event of death,
thinking, "I wish I had a stretch IRA. I a non-spouse beneficiary must receive
only named my spouse as my primary (and pay tax on) the entire balance of
beneficiary and my kids as my successor the retirement plan the year after the
or contingent beneficiary." Well, guess death of the retirement plan owner. These
what? You have a stretch IRA. After your retirement plans don't allow a non-spouse
death, your spouse and/or your children beneficiary to stretch distributions. For
could continue to defer income taxes for example, if there is a $1 million
many years after your death, as long as balance, the non-spouse heir or heirs
they are prudent and only take the annual will have to pay income taxes on $1
minimum required distributions mandated million. Then, the remaining balance,
by law. roughly $650,000 ($1 million minus the
$350,000 immediate income tax hit) would
While the "stretch" concept applies to be outside of the tax-deferred protection
some retirement plans, many heirs of 401k of an inherited IRA.
owners could be in for a rude awakening
if their parents fail to plan properly. Had the 401k participants taken that
money and transferred it into an IRA
With proper planning you can put in before he died, the non-spouse
place the mechanisms to stretch taxable beneficiary would have been able to
distributions from an inherited IRA and stretch the distributions based on his or
certain retirement plans for decades, her life expectancy. Failing to make the
sometimes as long as 80 years after the IRA transfer will result in an
original owner dies. If, however, the unnecessary massive income tax burden for
employer's retirement plan document the non-spouse beneficiary.Top IRA expert
stipulates the wrong provisions, the and author of Retire Secure!, James
stretch may be replaced by a screaming Lange, can keep you from jeopardizing
income tax disaster. The heirs could be your family's security. He has developed
in for a tax nightmare if Dad never tax-savvy retirement and estate plans for
transferred his retirement plan into an over 1400 U.S. citizens with appreciable
IRA. assets in their IRAs and 401(k) plans.
Boost your family's financial security
Many investors fail to realize that the with a regular dose of great information.
specific plan rules that govern their Sign up for his monthly Retire Secure
individual 401k or other retirement plan newsletter at Sign up now and get a free
take precedence over the IRS distribution bonus report on the best order to spend
rules for inherited IRAs or retirement your retirement assets.




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