401K vs. IRA Question

M

megacorp-firee

Thinks s/he gets paid by the post
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I have the bulk of my investments (over 60%) in my 401K. I believe there is an estate inheritance distribution reason for moving this from my 401K to an IRA.
I am one of the fortunates who unfortunately have to take into consideration estate planning (if my calculations using current course and speed are correct).
Has anyone else had to take this into consideration and how have you handled it?
Thanks.
 
I'm just responding so I wil get email notices of follow-ups so I can see what the answer is :confused: I wasn't aware of a distinction but could face the same situation with DW's 401k.
 
Are you referring to the "stretch" options for non-spousal beneficiaries? You can do those with IRAs so that they last longer. Supposedly that was supposed to be fixed with some recent law but I think there were some problems with implementation. I'm sure Martha knows the current status. I like having the 401K for its more robust creditor protection but the downside is the more difficult stretch which hopefully will be corrected soon.
 
kaneohe said:
Are you referring to the "stretch" options for non-spousal beneficiaries? You can do those with IRAs so that they last longer. Supposedly that was supposed to be fixed with some recent law but I think there were some problems with implementation. I'm sure Martha knows the current status. I like having the 401K for its more robust creditor protection but the downside is the more difficult stretch which hopefully will be corrected soon.
Click to expand...

I am thinking the same thing.......maybe OP could give us a little more info??
 
I willed my 401k into a trust fund for my dd that is suppose to be spread out over 25 years at most. The trust fund would only be established upon my death.

Does that sound right?
 
FinanceDude said:
The law is in place. I used it to transfer my sister's 403B to beneficiary IRAs for my sons.

Unfortunately, along the way I had to "educate" TIAA-Cref on the new law...........:p
Click to expand...
Yes, this is what I was referring to in my OP. Thanks FD, rs0460a, and Kaneohe, for clarifying.
Follow up questions:
1) what were the difficulities in implementation and do they still exist, since FD helped his sister out on this with her 403b
2) it seems that if the new law is in place, then holding everything in a 401K or an IRA makes no difference to the non-spousal inheritors. y/n?

My 401K has plenty of choices and much lower expense ratios than Vanguard. So all things being equal I guess my choice would be to leave things where they are.
 
JohnDoe said:
I willed my 401k into a trust fund for my dd that is suppose to be spread out over 25 years at most. The trust fund would only be established upon my death.

Does that sound right?
Click to expand...
Good question JohnDoe. I too have as the beneficiary of my 401K, my revocable trust. Does this cover my non-spousal inheritors?

This stuff is way too complicated. It might be easier to squander the nest egg. :D (... kidding ... I doubt that I could do it if I tried... not in my character, as is with most of the posters here).
 
I am not aware of the implementation issues of the new 401k rules, but that doesn't mean there isn't any. Basically, what the non-spouse person who inherits has to do is roll it over into what is called an inherited IRA and has to take at least required minimum distributions over their life expectancy. I believe that this works even with multiple beneficiaries (using the shortest life expectancy) but I am not sure about using a trust as a beneficiary as it has no life expectancy, but I would ask your tax adviser. I have some vague recollection that a qualified trust can use the life expectancy of the beneficiary and "stretch" out the distributions, but I could be wrong.

You might also try posting your trust question to the Fairmark forum Fairmark Forum
 
Last edited:
MCF----I agree about the complexity. Recommend you ask your questions at the
irahelp.com forum and then come back and educate us. I think at one point I saw
an update about the practical difficulties and status even w/ the new law on that site but I have not kept up to date. You can also get info about your trust question there----
again, it seems to be a highly technical question that depends on specific wording about beneficiaries----whether they are all specifically identifiable individuals or whether you have unnamed individuals (like charities) as contingent beneficiaries,etc. Again, not sure I really understand it.
 
I read the links and don't see anything about leaving them to people who aren't domestic partners of the same sex or parents, children or spouses. What about those of us that don't want to leave it to those people? My 401K is to be split between a niece and nephew, mom is 81 and doesn't need money and I don't have kids. My roommate isn't a domestic partner of the same sex or any way related to me. I don't know what rules would be for a opposite gendered domestic partner. We don't share anything financial and when my nephew wanted a girl to be a domestic partner they had to have shared financial things to cover her on his health insurance, so he married her.
 
donheff said:
I'm just responding so I wil get email notices of follow-ups so I can see what the answer is :confused: I wasn't aware of a distinction but could face the same situation with DW's 401k.
Click to expand...

ditto - I'm interested in the responses as I don't know the answer
 
My sister had a 403B, pretty much the same deal as a 401K. Unbeknownst to me, she left it to my two sons, who are minors. She died in August of 2006, and I was the executor of the estate.

I knew about the legislation, and waited until 2007 to move the account. I rolled them into beneficiary IRA's, and my sons have to take yearly RMD's on their life expectancy, but it only was about 1.3% and 1.5% respectively.

In effect, I created a "strech IRA", but with my sister's qualifed money, not mine.

It will be used for college for them, which was her dying wish............
 
kaneohe said:
here's a link to an update on irahelp.com about the 401K transfer to non-spouse beneficiaries.......sounds like the problem will be fully resolved in 2008
IRAHelp.com - Retirement Resources for Advisors
Click to expand...

This came into question in my case. However, since there was NO provision expressly NOT allowing this to happen in the SPD, I was able to persuade/threaten/implore TIAA-Cref to allow this to happen. In the end, I was successful, mainly because my scenario was covered under the new law at the time (early January 2007).

As far as how trust law goes, that would take more due diligence on my part, I will do some research, and perhaps before I can answer an answer will be posted........

Darn good question............:)
 
old woman said:
I read the links and don't see anything about leaving them to people who aren't domestic partners of the same sex or parents, children or spouses. What about those of us that don't want to leave it to those people? My 401K is to be split between a niece and nephew, mom is 81 and doesn't need money and I don't have kids. My roommate isn't a domestic partner of the same sex or any way related to me. I don't know what rules would be for a opposite gendered domestic partner. We don't share anything financial and when my nephew wanted a girl to be a domestic partner they had to have shared financial things to cover her on his health insurance, so he married her.
Click to expand...

Spouses get special benefits and basically can dump the inherited 401k or IRA into their own plan and take money out when they retire. What we are talking about is everyone other than a spouse. It used to be that if your 401k beneficiary was someone other than you spouse the income taxes had to be paid over a relatively short period of time. In 2006 the rules changed so that a non-spouse beneficiary of a 401k could directly rollover the 401k into what is called an inherited IRA. The beneficiary has to take minimum required distributions, but they are now "stretched" to be over the beneficiary's life expectancy. The problem with the new law as kanohe noted was that 401k plans did not have to allow for the rollover into an inherited IRA. Apparently this was fixed for 2008 and plans have to allow this.

The open question is whether these new rules apply, and how they apply, if the beneficiary is a trust.
 
Good so you can leave them to anybody not just parents, children and domestic partners. I might leave some to my great nephew and great niece they are really young so the money could last a long time.
 
Here's a link to an Ed Slott article re: trusts as beneficiaries of qualified plans.
Stretching Benefits: The new Pension Protection Act lets non-spouses inherit and stretch out company retirement plans.

The relevant section is under "Trust Opportunities" (below the brown box that
shows up about the middle of the page". You will have to figure out what a
see through trust is in order to interpret what he is saying.......I don't exactly
understand it but it is something like you have to be able to identify every individual who is a beneficiary and beneficiaries cannot be non-individuals like a charitable org.
(even if they are contingent??). Don't know whether beneficiaries can be unnamed
members of a class.....like ...my brothers and sisters;, etc.

A question/word of warning....if you find something you want to save that is accessed via a link, you may want to copy and paste the actual article rather than relying on the link. Seems to me that more than once the link works when fresh but not necessarily when aged. Just spent a long time w/o success searching for a Bruce Steiner article on see through trusts.
 
kaneohe said:
here's a link to an update on irahelp.com about the 401K transfer to non-spouse beneficiaries.......sounds like the problem will be fully resolved in 2008
IRAHelp.com - Retirement Resources for Advisors
Click to expand...
Thanks all.
I believe this link, along with the others in this thread answer the question. In my case, I have a trust that is the beneficiary of the 401K. My dw is co-owner of the trust and it names individual non-spousal beneficiaries (my children). They can roll the 401K into an inherited IRA when the time comes. The new 'technical correction' makes it mandatory (tomorrow, Jan 1, 2008) that 401k plans allow for this. One of the 'gotchas' that I need to consider are the tax ramifications of trusts (35% rate) vs. individuals.
Have I read this correctly?
 
MCF----I highly recommend you post your question on the irahelp.com forum.
As you have already noted this is a complex situation involving both estate tax
and stretch IRA/401K issues . Somehow I have gotten the idea that normally
individual beneficiaries are recommended for IRAs/401Ks. Purely from the stretch aspect then, why not have spouse as beneficiary of 401K and kids as contingent?
If spouse survived you, she could name kids as beneficiary of her IRA (from your
401K) and if she didn't survive you, kids could setup stretch IRAs from your 401K
with their longer life expectancies . Don't know estate tax consequences of doing this.

If trust is beneficiary of 401K, does that mean dw has access to funds and does that mean that RMDs are based on her shorter life expectancy? What happens after she
is gone.......are RMDs still based on her shorter life expectancy?

If dw does not have access to funds, what is advantage of trust over having kids
as beneficiaries? No answers, only questions ....which is why I recommend
irahelp.com . Good luck on the learning curve.
 
kaneohe said:
MCF----I highly recommend you post your question on the irahelp.com forum.
As you have already noted this is a complex situation involving both estate tax
and stretch IRA/401K issues . Somehow I have gotten the idea that normally
individual beneficiaries are recommended for IRAs/401Ks. Purely from the stretch aspect then, why not have spouse as beneficiary of 401K and kids as contingent?
If spouse survived you, she could name kids as beneficiary of her IRA (from your
401K) and if she didn't survive you, kids could setup stretch IRAs from your 401K
with their longer life expectancies . Don't know estate tax consequences of doing this.

If trust is beneficiary of 401K, does that mean dw has access to funds and does that mean that RMDs are based on her shorter life expectancy? What happens after she
is gone.......are RMDs still based on her shorter life expectancy?

If dw does not have access to funds, what is advantage of trust over having kids
as beneficiaries? No answers, only questions ....which is why I recommend
irahelp.com . Good luck on the learning curve.
Click to expand...
kaneohe, Good idea, I will do that.

I have found that precise wording (aka lawyer B.S. weasel words, my apologies to all the esquires out there) in explainations is critical.

In my case, we have two trusts set up. One for DW and one for me. We are co-owners of the trust for each one. So when I pass, she has total access to the contents of my trust. She is the primary beneficiary of my 401K with the trust being contingent (I think thats the term)... in any case, she can refuse it and then it goes into the trust. The reason for it going into the trust is purely estate planning (one part of us hopes that each trust is so big that we have to worry about estate taxes, ...etc., the other part hopes we spend it all, as our kids tell us to do). If she precedes me in death then I (previously to tomorrow) had to worry about 401K not being able to roll to kids without bad tax consequences (payment of taxes over a few years vs. the extended life of the kids). Hence my original posting, since I had heard that things were changing, but did not quite know how they were changing or when. It looks like congress has fixed that. When we both pass, the funds in both our trusts go into a separate trust for each of the kids. At that point, I believe I know longer care what happens to the money, although I have set it up so that it can grow for generations, if it lasts that long. Personally I hope my son and daughter buy nice big yachts and names them 'Daddy's Gift' :D, or something like that (since my DW and I don't have the monetary temperment nor desire to do so). hmm I think I am kidding, but not quite sure.

So, I think I have the answer to the question I had posted, but as you point out, it does not hurt to get a verification of this.

I have found that we have many regulars on this board who have the knowledge and inclination to help and 'point' in these complex matter. Thanks to all and have a Happy New Year.
 
kaneohe said:
A question/word of warning....if you find something you want to save that is accessed via a link, you may want to copy and paste the actual article rather than relying on the link. Seems to me that more than once the link works when fresh but not necessarily when aged. Just spent a long time w/o success searching for a Bruce Steiner article on see through trusts.
Click to expand...

here's a link to that article
http://www.kkwc.com/docs/AR20041209132954.pdf

long and not always easy to understand (at least for me) but there is a
section on children's trusts and taxation if you page down far enough.

hopefully this reply works this time......what does zero sized reply mean
and no resulting post?
 
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