Rules vary for bequeathing 401(k)s

Money Talk

Your Money

February 15, 2004|By MATT LUBANKO

MUCH is written about IRAs left to heirs. But I cannot find anything on strategies for bequeathing a 401(k) plan to one's heirs. Why is this so? And how can I, as a retiree who would like to stay in my ex-employer's 401(k) plan, learn about leaving those assets to my children after I die?

- F.N., Plainfield, Ill.

Post-retirement 401(k) management strategies are scarce because each plan can impose its own set of rules.

With the rules being so varied and quirky, it's difficult to concoct a uniform plan. That leaves you, a retired 401(k) accountholder, with several options:

Contact the plan administrator.

Ask for and read your 401(k) plan's "summary plan document."

Ask for and read your 401(k) plan's full "plan document."

FOR THE RECORD - The Money Talk column in the Business section Feb. 15 misstated rollover provisions for a 401(k). It should have said that a minor or adult child, as a "non-spousal beneficiary," cannot roll over an inherited 401(k) account to an IRA.

Make sure you understand the rules of your plan.

"Each plan is different, all with rules set by the employer. If you don't know the rules, you could be in for a few unpleasant surprises," said Ted Benna, president of the 401(k) Association, a national advocacy group for 401(k) plan participants, based in Jersey Shore, Pa.

To see precisely what Benna is talking about, let's take a quick look at rules that might exist on 401(k) assets left to children.

At Company A, the rules could mirror the laws enforced by the IRS as they relate to inherited IRAs. (Download IRS Publication 590: Individual Retirement Arrangements from the www.irs.gov Web site. See page 18.)

If such rules are in place, and if all your paperwork is handled correctly, your children could inherit your 401(k), much as they could inherit an IRA from you.

With this inherited 401(k), they would be required to take minimum withdrawals every year. The minimum amount to be withdrawn would be based on their age and life expectancy - each spelled out in a table on page 81 of Publication 590.

Example: Your child is 49 years old. At the end of 2005, she possesses $100,000 in 401(k) assets she inherited from you in 2004. Based on her age, life expectancy and end-of-year balance in 2005, she would be required to withdraw $2,849 in 2006 (or $100,000 divided by her life expectancy of 35.1 years).

The problem with Publication 590 is that it might have little bearing on the rules that govern your 401(k) plan. Additional rules could come into play.

It's possible, for example, for your company to ask your children to immediately roll your bequeathed 401(k) money to an IRA; they would have 60 days to complete this rollover before tax penalties might come into play.

Or maybe your company would insist that your children take an immediate distribution from the plan. This distribution of inherited property to your children would be taxed as regular income. And this forced distribution would deny your heirs many years of tax-deferred protection on income, protection that they could have received from an inherited IRA.

"Theoretically, a forced distribution of a 401(k) account is possible. It's not the norm, but it's possible," said Jim Szostek, a 401(k) compliance consultant with the Hartford Financial Services Group. The Hartford manages about $5 billion in 401(k) assets.

The only way to really know what would happen to a 401(k) bequest is to read the rules of your plan. Those are the only rules that matter to you.

When must I take required minimum distributions from an IRA?

- C.K., Allentown, Pa.

You must take your first required minimum distribution from IRAs "by April 1 in the year after the calendar year you first turned 70 1/2 ."

Example: You were born June 28, 1933, and turned 70 1/2 on Dec. 28, 2003. This would mean you would have to take your first distribution from an IRA by April 1, 2004, for the 2003 tax year. Your next distribution must be taken by Dec. 31, 2004, to meet your requirements for the 2004 tax year.

Matthew Lubanko is a financial columnist for the Hartford Courant, a Tribune Publishing newspaper. E-mail him at yourmoney@tribune.com.

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