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 wondered
if it was some special kind of IRA? Well, it isn't. In theThe distribution rules that come into play at the death
simplest terms, a stretch IRA is an IRA that has aof the retirement plan owner are usually found in a
beneficiary designation that provides for the possibilityplan document that few employees or advisors ever
of maintaining the tax deferred status of the IRA afterread. Many, if not most plan documents say that in the
the death of the IRA owner. You might be thinking, "Ievent of death, a non-spouse beneficiary must receive
wish I had a stretch IRA. I only named my spouse as(and pay tax on) the entire balance of the retirement
my primary beneficiary and my kids as my successorplan the year after the death of the retirement plan
or contingent beneficiary." Well, guess what? Youowner. These retirement plans don't allow a
have a stretch IRA. After your death, your spouse andnon-spouse beneficiary to stretch distributions. For
or your children could continue to defer income taxesexample, if there is a $1 million balance, the non-spouse
for many years after your death, as long as they areheir or heirs will have to pay income taxes on $1 million.
prudent and only take the annual minimum requiredThen, the remaining balance, roughly $650,000 ($1 million
distributions mandated by law.minus the $350,000 immediate income tax hit) would
be outside of the tax-deferred protection of an
While the "stretch" concept applies to someinherited IRA.
retirement plans, many heirs of 401k owners could be
in for a rude awakening if their parents fail to planHad the 401k participants taken that money and
properly.transferred it into an IRA before he died, the
non-spouse beneficiary would have been able to
With proper planning you can put in place thestretch the distributions based on his or her life
mechanisms to stretch taxable distributions from anexpectancy. Failing to make the IRA transfer will result
inherited IRA and certain retirement plans for decades,in an unnecessary massive income tax burden for the
sometimes as long as 80 years after the originalnon-spouse beneficiary.Top IRA expert and author of
owner dies. If, however, the employer's retirement planRetire Secure!, James Lange, can keep you from
document stipulates the wrong provisions, the stretchjeopardizing your family's security. He has developed
may be replaced by a screaming income tax disaster.tax-savvy retirement and estate plans for over 1400
The heirs could be in for a tax nightmare if Dad neverU.S. citizens with appreciable assets in their IRAs and
transferred his retirement plan into an IRA.401(k) plans. Boost your family's financial security with
a regular dose of great information. Sign up for his
Many investors fail to realize that the specific planmonthly Retire Secure newsletter at Sign up now and
rules that govern their individual 401k or otherget a free bonus report on the best order to spend
retirement plan take precedence over the IRSyour retirement assets.
distribution rules for inherited IRAs or retirement plans.