inherited 401ks

[Martha]

It used to be that only spouses could rollover an inherited 401k into their own IRA. Children or others who inherited such plans had to withdraw and pay taxes on the money often within a very short time. Some plans even required immediate withdrawl; most plans required withdrawal in a year to five years. Legislation was just signed into law which provides that 401(k)s and other company sponsored plans can be transfered by any heir directly into an IRA and withdrawn over the heir's life expectancy. You have to do it right. You form what is called an inherited IRA, you don't roll it over into existing IRAs.

This effects far more people than estate taxes and is an important development.

http://www.kiplinger.com/personalfinance/features/archives/2006/08/pensionbill2.html

Today's WSJ also has an article on the new law.

 

[FinanceDude]

Doubt it would have happened with a Democratic majority in Congress..........................

 

[wabmester]

Doubt it would have happened with a Democratic majority in Congress..........................

You mean only Republicans know how to cut taxes while increasing spending? 

 

[Martha]

The pension legislation (which this IRA rule is contained in) is the first step in the two step process.

1) Shore up pensions as much as possible (to lessen future pain that's coming)

2) Roll back Social Security and Medicare

It is now clear more than ever - you are on your own. Don't expect much from your company or from your government.

- And by the way it's coming regardless of which party is in power.

Medicare is a problem. Let's solve it with a national healthcare system.

I think we can be ok with social security with some judicious tweaks.

The motives of those who passed the new pension legislation may be less than pure, but they don't control who is going to be in power two years from now.

EDIT to clarify political position FWIW: I am in support of estate taxes (though this is not an estate tax issue, it is an income tax issue) because in my mind we should minimize taxes on the living before minimizing taxes on the dead. I also have a problem with too much inherited wealth, as class mobility in the United States has declined tremendously from what it was 50 years ago. So, politically I probably would not support the change in the law. On the other hand, the taxes aren't eliminated, they are just not paid at once, so I am not sure where I would come down on this law. Anyway, since I love all you guys out there I am going to pass on changes in the law which may be to your and your families advantage.

 

[FinanceDude]

You mean only Republicans know how to cut taxes while increasing spending? 

No.............I think ALL Congressmen have to pass that course before they are sworn in............

 

[Texas Proud]

Martha...

Strange that you would not be for an estate tax reduction (or elimination)... it is one of the few taxes a big majority would want to eliminate.. Why? It is one of the most unfair taxes... you have paid taxes on almost all of your wealth when it was created.. now they want to take another chunk out when you die... and it is NOT a tax on the dead, but a tax on the heirs of the dead...

Very rich people can get around the tax.. I remember way back when I did estate taxes, Ernest and Julio Gallo (yes the wine people) got some special legislation passed that basically said they did not have to pay estate taxes when they died... so, if you have a few hunderd million or a billion laying around, get an exemption.. let the people with $2 to $5 million estates pay the tax...

sorry for the thread hijak...

 

[FinanceDude]

Rockefeller was smarter than everyone. He knew the legislation was going to change, so he established his trust before the legislation was passed.........

Bottom line, his trust is worth billions and billions of dollars, has grown for 80 years, even though more and more relatives are drawing from it, etc.

But the rich have ways we don't..............

I read that Ross Perot once made $100 million in one year, but his marginal tax bracket was 2%........so he only got taxed on $2 million..................

 

[youbet]

Martha et al.....

What's the situation for money already moved from your 401K to a rollover IRA at the time of your death?  Although retired, I still have my 401K intact with my employer.  Would I now be better off, from an estate planning point of view, to leave it there or to roll it over as I was planning to do shortly?  Any comments from the board?

 

[Martha]

Martha...

Strange that you would not be for an estate tax reduction (or elimination)... it is one of the few taxes a big majority would want to eliminate.. Why?  It is one of the most unfair taxes... you have paid taxes on almost all of your wealth when it was created.. now they want to take another chunk out when you die... and it is NOT a tax on the dead, but a tax on the heirs of the dead...

Very rich people can get around the tax.. I remember way back when I did estate taxes, Ernest and Julio Gallo (yes the wine people) got some special legislation passed that basically said they did not have to pay estate taxes when they died...  so, if you have a few hunderd million or a billion laying around, get an exemption..  let the people with $2 to $5 million estates pay the tax...

sorry for the thread hijak...

I don't find it unfair in the least. You are dead. Your heirs did not earn the money. The tax is not on them. Also, they do get the benefit of a step up in basis. For those without a taxable estate they still get a step up in basis. That gain that could be immediately realized will never be taxed.

I am uncomfortable with perpetuating wealth anymore than we already do.

 

[Martha]

Martha et al.....

What's the situation for money already moved from your 401K to a rollover IRA at the time of your death?  Although retired, I still have my 401K intact with my employer.  Would I now be better off, from an estate planning point of view, to leave it there or to roll it over as I was planning to do shortly?  Any comments from the board?

I believe that you can chose to have that IRA distributed to you over your life expectancy.  I will double check unless someone beats me to it.

EDIT: Publication 590 discusses the issue. http://www.irs.gov/publications/p590/ch01.html#d0e5724

The rules are a bit complex.

 

[saluki9]

I don't find it unfair in the least. You are dead. Your heirs did not earn the money. The tax is not on them. Also, they do get the benefit of a step up in basis. For those without a taxable estate they still get a step up in basis. That gain that could be immediately realized will never be taxed.

I am uncomfortable with perpetuating wealth anymore than we already do.

Martha, to honestly believe that don't you have to be a person who thinks that wealth belongs to the government and not the individual?

The thought of it being ok because you're heirs "didn't earn that money" makes me ill

I happen to think it is the most unfair tax our govt subjects its people to

 

[retire@40]

Martha, to honestly believe that don't you have to be a person who thinks that wealth belongs to the government and not the individual? 

I happen to think it is the most unfair tax our govt subjects its people to

Unfair, but necessary. The strength of this country is in maintaining a robust and reasonably happy middle class.

Without the estate tax, we would be a country of have-lots and have-nones.

I'd like to see the estate tax threshhold at the $5 million and above level right now.

 

[FinanceDude]

I happen to think it is the most unfair tax our govt subjects its people to

How about the "marriage penalty tax"

 

[Andre1969]

The thought of it being ok because you're heirs "didn't earn that money" makes me ill

Heck, the government "didn't earn that money" either!

 

[saluki9]

The thought of it being ok because you're heirs "didn't earn that money" makes me ill

Heck, the government "didn't earn that money" either!

I know, some people here seem to think that everything belongs to the govt. Out of their infinite kindness they let us keep some

 

[retire@40]

How about the "marriage penalty tax"

There is no "marriage penalty tax."

 

[youbet]

EDIT: Publication 590 discusses the issue. http://www.irs.gov/publications/p590/ch01.html#d0e5724

The rules are a bit complex.

Now there is an understatement!     Thanks for the reference.  I'll dig into it right after I get tonight's dinner into the marinade. DW is substitute teaching today and I don't want her to be disappointed when she returns from the salt mine.

On the general subject of inheritance taxes.........  I've always believed that laws, rules, regulations, etc., are judged for fairness by their equity across groups.  For example, the marriage tax is hated by dual career married couples because couples "living together," don't have to pay it.  In the case of the inheritance tax, I think the problem is that the folks with the big bux seem able to avoid it.  Only those worth a million, or two, or four, etc., seem to get hit.  I'd like to see the rules adjusted so that all of the famous Kennedy clan would be regular ole middle class folks next generation unless they make every dollar they have themselves.  No benefit from intergenerational wealth whatsoever. Of course, that will never happen. The ultra-rich will continue to essentially escape the inheritance tax regardless of how it is changed.   

 

 

[youbet]

No.............I think ALL Congressmen have to pass that course before they are sworn in............

FinanceDude....

A word of caution..... that type of independent thinking is sometimes frowned upon on this board. 100% party loyalty seems to be more mainstream.

If you care.......!

 

[unclemick]

Yeah man - be a Democrat like me - since birth 1943 - I've been on both sides of every issue depending on which decade I was voting in.

heh heh heh heh heh

 

[Nords]

In the case of the inheritance tax, I think the problem is that the folks with the big bux seem able to avoid it.  Only those worth a million, or two, or four, etc., seem to get hit.  I'd like to see the rules adjusted so that all of the famous Kennedy clan would be regular ole middle class folks next generation unless they make every dollar they have themselves.  No benefit from intergenerational wealth whatsoever. Of course, that will never happen. The ultra-rich will continue to essentially escape the inheritance tax regardless of how it is changed.   

After all our efforts to LBYM and ER, are you suggesting that we shouldn't use our hard-earned financial-management skills to keep our wealth for ourselves?

If the Kennedys have their assets hanging out there pushing the envelope to the latest bleeding edge of tax evasion avoidance scheming planning, then I'm happy to see their lawyers spread the knowledge to be used for my benefit! Because if it wasn't for pit bull aggressive legal tactics, then we wouldn't be seeing these legislative changes to IRA conversions and inheritances.

 

[greg]

On the general subject of inheritance taxes......... I've always believed that laws, rules, regulations, etc., are judged for fairness by their equity across groups. For example, the marriage tax is hated by dual career married couples because couples "living together," don't have to pay it. In the case of the inheritance tax, I think the problem is that the folks with the big bux seem able to avoid it. Only those worth a million, or two, or four, etc., seem to get hit. I'd like to see the rules adjusted so that all of the famous Kennedy clan would be regular ole middle class folks next generation unless they make every dollar they have themselves. No benefit from intergenerational wealth whatsoever. Of course, that will never happen. The ultra-rich will continue to essentially escape the inheritance tax regardless of how it is changed.

Hello again youbet:

Oh, boy! Hi-jacking DW's thread. I hope I'm making something good for supper!

I disagree somewhat with your inheritance tax ideal. I want those children of hard working business owners to have an opportunity to continue with the business or farm, working inside the environment that their parents helped create and had not created purely for self-interest. Many ways are currently possible, not just using the tax code. Some passing of money on is a partial solution in a complex world. As I see things, our Constitution has always worked toward pushing things toward the middle. Checks and balances temper extremes--for the most part. We have grown great as a country because we always push things back toward the middle-- away from excess--or the market does it for us: We try to assist some who are at the lower end, who may need a helping hand; we have pulled some near the top of the income pyramid back from excess. This is important to continue, so we don't end up as a country of crack addicts and Paris Hiltons, poor extremes and rich extremes. The tax code is just one tool that helps achieve this. Again, I like things that balance and moderate extremes. At least that's how I see things.

 

[youbet]

After all our efforts to LBYM and ER, are you suggesting that we shouldn't use our hard-earned financial-management skills to keep our wealth for ourselves?

If the Kennedys have their assets hanging out there pushing the envelope to the latest bleeding edge of tax evasion avoidance scheming planning, then I'm happy to see their lawyers spread the knowledge to be used for my benefit!  Because if it wasn't for pit bull aggressive legal tactics, then we wouldn't be seeing these legislative changes to IRA conversions and inheritances.

Good point Nords.  And I'll agree so long as the laws and rules are not so onerous that only the super wealthy can afford to run the legal minefield to take advantage of them.  In today's world, I think the Kennedys and their kind are able to utilize tax avoidance schemes strategies more frequently than middle class canon fodder like you or I. 

 

[youbet]

Hello again youbet:

Oh, boy!  Hi-jacking DW's thread.  I hope I'm making something good for supper! 

I want those children of hard working business owners to have an opportunity to continue with the business or farm, working inside the environment that their parents helped create and had not created purely for self-interest.   that helps achieve this..........I like things that balance and moderate extremes.  At least that's how I see things. 

Can't argue with that Greg!

Maybe I'm just paranoid, but I worry that changes to the inheritance tax structure and other wealth-passing laws/rules/regulations will result in the ultra-wealthy being able to pass wealth unemcumbered and small business owners, professionals and, heck, even working class slobs who accumulated a large financial portfolio by LBYM and smart investing will get screwed.

You better be making something good for supper............!   

 

[FinanceDude]

FinanceDude....

A word of caution.....   that type of independent thinking is sometimes frowned upon on this board.  100% party loyalty seems to be more mainstream. 

If you care.......!   

I will keep that in mind...........and with two Republicans and three Democrats in my immediate family, it's not like MY VOTE has mattered anyway since I started voting in 1980......................

 

[Texas Proud]

Unfair, but necessary.  The strength of this country is in maintaining a robust and reasonably happy middle class.

Without the estate tax, we would be a country of have-lots and have-nones.

I'd like to see the estate tax threshhold at the $5 million and above level right now.

Way wrong on this one... the estate tax is not a wealth redistribution tax... it goes into the large bucket of the gvmt... and it is SO small it is a drop... and the cost of getting that small drop is a hugh percentage of the tax..

The normal income tax is the one that creates wealth redistribution with the various earned income credit etc that is given to the low wages.. none of that helps out the middle class...

And why does the vast majority of people who will never pay this tax want it repealed? Because THEY think it is unfair and/or hope one day they have that wealth and do not want it taxed...

I earned it and paid tax on it, I saved it instead of spending it... and now you want to tax it again because I die... geee what a great country...