New pension laws good news for people inheriting accounts
Vail, CO, Colorado
As you’re probably aware, traditional pension plans have not fared so well in recent years. In fact, many large companies have frozen or discontinued their plans. Congress passed laws last year to strengthen pensions, but some other provisions of this legislation may interest you even if you don’t have a pension or if you may be coming into an inheritance that includes a 401(k).
By the time many people retire, their 401(k) or other employer-sponsored retirement plan may be their biggest single financial asset. Even if people die before depleting the funds in their 401(k) or other plan, they might still have a large chunk of money to pass on.
It’s never been much of a problem to leave money to a spouse, who could roll the funds into an IRA. Once the money was in that IRA, the surviving spouse could continue getting the benefits of tax-deferred growth.
Non-spouse beneficiaries ” children, grandchildren, siblings or domestic partners ” did not have this luxury. When these beneficiaries inherited a 401(k) or other retirement plan, they were generally forced to take the entire balance within five years of the account owner’s death, and some plans required them to take the payout as a lump sum within one year. Those beneficiaries were likely to take a big tax hit after they inherited the 401(k) or other retirement plan.
Things have changed, thanks to new pension laws. Effective Jan. 1 of this year, if you are a non-spouse beneficiary, you can transfer an inherited 401(k) or other retirement plan into an IRA. That means you can “stretch out” distributions and taxes over your lifetime, rather than being forced to take withdrawals immediately or over a period of a few years.
By stretching the time you put money into an inherited account, your own IRA can continue to provide tax-deferred growth, which can create a significantly greater amount of income over your lifetime.
This can be a huge advantage. But you need to make sure you’re following the correct procedures, specifically, creating an account just for an “inherited” pension. Once this account is established, you can’t contribute anything more to it or roll the money into any other IRA you might have.
Your financial adviser can help you set up the inherited IRA and invest the distributions from the 401(k) or other plan to help you meet your financial goals in a way that is appropriate for you. You may also want to consult with your tax adviser before transferring funds from the retirement plan to the IRA. In any case, once you learn you are going to inherit a 401(k) or other retirement plan, start doing your homework right away. If managed correctly, this type of inheritance can make a big difference in your life, so make the most of your opportunity.
Tina DeWitt and Charlie Wick are financial advisers with Edward Jones. They can be reached in Edwards at 926-1728 and in Eagle at 328-4959.