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Investment Planning |
The Stretch IRA
We recommend rolling over a 401(k) plan soon after you leave a job. Consolidating your assets will cut down on paperwork, and you’ll enjoy increased, often better investment options.
But the most important benefit of a timely 401(k) rollover may be experienced after your death. If the beneficiary of your retirement plan is your spouse, the account generally will continue in tax-deferred status until your spouse turns 70 1/2, and the minimum required distributions begin. Converting a 401(k) to a stretch IRA allows retirement plan assets to be used by two generations: your spouse and your children or other beneficiary.
Your employer’s 401(k) plan document controls whether or not a non-spouse beneficiary will be allowed to stretch out a retirement plan. Minimum required distributions must be made, regardless of a beneficiary’s age (or youth!). In the worst case, your 401(k) plan may require that a non-spouse beneficiary take a full withdrawal from the account within five years of a plan participant’s death. Taxes are due upon distribution, and no further tax-deferral is available.
Why would an employer force your children, grandchildren or siblings to withdraw your 401(k) funds so soon after your death? Because maintaining custody of assets is expensive.
Retirement account planning is imperative for singles, as well as for couples. As part of your planning checklist, make sure you have chosen both primary and contingent beneficiaries for your IRAs and 401(k) plans. If you have a 401(k) account from a former employer, roll over the assets into an IRA, so you can protect the stretch-out provisions and provide your beneficiaries with greater flexibility.
Tips Disclaimer
These tips contain information that may change over time as a result of new tax legislation. Although we make efforts to keep this information current, you should check with your tax advisor before taking action based upon any information contained in these tips.