Your Questions Answered - Can You Stretch a 401(k)?
A reader recently asked if his 401(k) could be rolled over, by his beneficiary, to a 'stretch' IRA after his death.
Read on to discover an answer that will protect your beneficiaries from tens of thousands of dollars in unnecessary taxes and keep your gift to them alive for generations to come. Whether or not your beneficiary can rollover your 401(k) at your death (and subsequently stretch it) depends on who your beneficiary is and the terms associated with your company plan. Basically, you usually can't stretch a 401(k) account directly, but if that money is rolled into an IRA, you can. This is a situation where the details matter.Let's assume for the sake of illustration that you have a wife and 3 children.
If your spouse is the beneficiary, she can roll the money from your 401(k) to her own IRA. Assuming that she has named the 3 children as beneficiaries of her IRA, they would have the ability to stretch it at her death. (?Stretching' an IRA refers to the ability for a beneficiary to take distributions based on their life expectancy instead of all at once.)Ideally, she would divide the money into 3 IRAs and name one child as the beneficiary for each one. That allows each child to stretch the IRA over their life expectancy. If the 3 children are the beneficiaries of 1 IRA then it would be stretched based on the oldest beneficiary's life expectancy.On the other hand, if your children are the beneficiaries of your 401(k) plan they may or may not be able to stretch it.
Let me explain. The tax laws allow for beneficiaries to stretch out distributions, but most company retirement plans do not permit it. The reason is simple--the stretch can take place over decades.If the company allowed that, then they would be responsible for all the administration. There isn't any benefit to the company to do so while it exposes them to potential liability. Instead, most company plans will cash out the beneficiaries at the death of the employee.
At best, the beneficiaries may be able to stretch it out over 5 years.Realize what this means. Let's say you have $600,000 in your 401(k). If your wife is the beneficiary, she can roll it to her own IRA and then when she dies, the children can stretch it. If a child is in their 50's, that means that taxes can continue to be deferred (except for the annual required distribution) for almost 30 years. $200,000 can literally grow to millions of dollars over 30 years.If those children were the beneficiaries of your 401(k) instead and were cashed out at your death, they would not have the ability to roll that money to an IRA.
They would have to pay taxes on all of that money in the year it was distributed. In our example, each of your three children would have to claim $200,000 in ordinary income that year! This would bump each child's tax bracket and could result in 35% of it being lost in taxes. That's a tax bill of $70,000 each, or a total of $210,000 in taxes on your $600,000 nest egg.Even if you have your wife as the primary beneficiary of your 401(k) and your children as the contingent beneficiaries, you are opening up the possibility of the children not being able to stretch distributions. If your wife passes away before you, or you both die in an accident, the 401(k) money would go to the children and most likely be distributed immediately.There really aren't any benefits to keeping your retirement money in a 401(k) after you retire, but several big disadvantages. All of this is easily avoided by simply rolling that money to your own IRA.
Your investment options will be much greater, and so will your flexibility and control.I love to personally answer readers' questions. If you'd like free, unbiased advice send your questions to e-mail protected from spam bots. Read answers to questions other readers have asked on the Q&A page at www.guardingyourwealth.com. Mr. Voudrie is a Certified Financial Planner, nationally syndicated newspaper columnist and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN.
He can be reached toll-free at 1-877-827-1463 or at e-mail protected from spam bots.[For more Free Financial Advice and information about 'stretch' IRA's read ?How To Stretch Your IRA - Tax Free' and ?Q&A: Stretching An IRA' in our Article Repository at www.guardingyourwealth.com]Looking for an energetic expert who is passionate about financial and wealth management?
Mr. Voudrie is an excellent speaker who will excite and inspire your audience.
Mr. Voudrie is available for a limited number of speaking engagements, television appearances and radio talk shows.
For booking information, contact Christine Withey at (877) 827-1463 or email e-mail protected from spam bots.Related Articles can be found at www.guardingyourwealth.com under the Guarding Your Wealth Article Archive:Getting The Most Out of Your 401(k)How To Stretch Your IRA ? Tax FreeQ&A: Stretching An IRA.
WHAT IS A TRADITIONAL IRA?
With a traditional Investment Retirement Account (IRA) you pay taxes when you take the money out at retirement in the future. Make sure that this account is really worth opening in your situation because what you put in the account today may be fully deductible, partially deductible or non deductible, depending upon your income and other retirement coverage. If you contributions are not fully deductible then this account is probably not for you. The traditional (and Roth IRAs) allow you to save $3,000.00 in 2004 and $4,000.00 in 2005. If you are over 50 years old you can save an additional $500.00 as catch-up.
You put the maximum amount in if you (or your spouse) are not covered at any time during the tax year by a retirement plan, including a 401(k) account, at work. If you can't afford to save the maximum then just do the best that you can.If you are single or a head-of-household taxpayer with annual adjusted gross income (AGI) between $40,000 and $50,000 and are eligible for...
WHAT IS A TRADITIONAL IRA?
Ira > WHAT IS A TRADITIONAL IRA?
New Tax Bill Creates the Greatest Tax Break of Your Life
Pittsburgh, PA (ContentDesk) May 18, 2006 -- James Lange, CPA/Attorney, says
taxpayers with an AGI greater than $100,000 need to know about the New Open Season for Roth IRA conversions that is provided for in the new tax law.Respected Roth IRA expert Lange says: The new tax law is HUGE for taxpayers making more than $100,000 who have an IRA. The long term benefit to your family of making a Roth IRA conversion can be estimated by multiplying the current value of your IRA by 15. Wednesday, May 17, 2006, President Bush signed a major tax bill that
presents wealthy Americans with an outstanding lifetime opportunity. The Tax Increase Prevention and Reconciliation Act (TIPRA) will lift the $100,000 AGI ceiling on Roth IRA conversions for tax years after 2009. In 2010, wealthy Americans will, for the first time, qualify for
Roth IRA conversions. Lets look at a scenario:
a taxpayer makes more than $100,000 and he has a $500,000 IRA. If he converts his IRA...
Ira > New Tax Bill Creates the Greatest Tax Break of Your Life
Roth IRA Contributions
The Roth IRA, or the individual retirement arrangement, is an ideal way to save for the retirement years. An individual can open his own IRA and contribute funds to it. What an individual contributes to the Roth IRA is termed as the compensation income. If you are employed, then the compensation income is the paycheck you get in lieu of your services. Compensation income can also be the income you get from being self-employed, or what you get from an alimony settlement.
There is a limit to the amount which a person can contribute.
The Contribution cannot be more than $4,000 per financial year, or 100% of your earned income, whichever is less. To contribute to the Roth IRA, you need to have taxable income, and also the adjusted gross income should be less than $110,000 individually, $160,000 if you are married and file a joint return, and $100,000 if you are married but file separate returns. Also, the amount you contribute to the Roth IRA will be reduced by the Contributions...
Roth IRA Contributions
Ira > Roth IRA Contributions
New Program Announced that Helps People Finance Real Estate Using Their IRA or 401k
(ContentDesk) July 28, 2006 -- Sum Total Financial Management has launched a new program that allows people to leverage their IRA or 401k to buy a home, property, vacation home, or any other real estate investment. The new program gets you cash flow that you need to ease the pain of making mortgage payments. Why be in a cash crunch or borrow money from the bank when you already have money in your 401k or IRA? Call Terry Treudt at 866-654-7200 or visit http://usirarealestate.com today to find out how you can be living worry free in your new home..
New Program Announced that Helps People Finance Real Estate Using Their IRA or 401k
Ira > New Program Announced that Helps People Finance Real Estate Using Their IRA or 401k
SEP IRA - For Last Minute Tax Deductions
Virginia - February 24, 2003 - The SEP IRA is one of the few remaining methods for small business owners to cut their taxes for last year.
Employer contributions made to a Simplified Employee Pension-Individual Retirement Account, known as a SEP plan, before a company's tax filing deadline are deductible for 2002.
This holds true even if the SEP plan is set up and the contributions are made in 2003."A SEP-IRA allows small business owners and sole proprietors in a very simple manner to cut their tax liability by making retirement contributions for their eligible employees," says Daniel Lamaute, retirement plan specialist at InvestSafe.com and CEO of Lamaute Capital, Inc.The SEP-IRA has several main advantages for employers, says Lamaute.
"Employers get a tax deduction while the SEP-IRA contribution is not taxed as income to the employees.
The earnings within the SEP IRA are taxed deferred until the participant pulls money out, usually at retirement...
Ira > SEP IRA - For Last Minute Tax Deductions
78 Days Left Until the NFL and Love Kickoff - Then the Game is Afoot
Canton, OH (ContentDesk) June 20, 2006 There is now 78 days left until the NFL and Love 2006 kick off challenge. The Pros haven't been sitting on the bench during the off-season and hopefully you haven't either. With summer in full swing the NFL pros and the Love Pros have been hard at work to prepare for the coming months.Love as with football takes teamwork and practice. There are rules and strategies for every game. Football teams use their own playbook, for Love Pros the playbook is...
Ira socks Your Questions Answered - Can You Stretch a 401(k)? 78 Days Left Until the NFL and Love Kickoff - Then the Game is Afoot
Ira > 78 Days Left Until the NFL and Love Kickoff - Then the Game is Afoot
Enemy "Soldiers" on American Soil. We know who they are. By Lieutenant Colonel Bob Weinstein.
"Hey, is there a war going on here? Looks like you're dressed for battle!" a sunbather on Fort Lauderdale Beach shouts as he sees Bob Weinstein, known as The Health Colonel, getting the civilians into shape with his military-style workouts designed for all fitness levels called beach boot camp. Bob's immediate response, "Yes! There is a war going on right here on American soil, and a lot, yes, too many Americans are dying daily!" While sipping on his beer and puffing his cigarette, the sunbather...
Enemy "Soldiers" on American Soil. We know who they are. By Lieutenant Colonel Bob Weinstein. fitness
Ira > Enemy "Soldiers" on American Soil. We know who they are. By Lieutenant Colonel Bob Weinstein.
First Redline:Time Attack! Presented by Hawk Performance Brake Pads to be featured on G4TV’s 'Street Furty' Television Series
Palmdale, California, 10/26/2005 - Touted as the most legit, in-depth and truly "street" take on the adrenaline-drenched world of import car racing and modification, G4TV's Street Fury television series will be on location at Spring Mountain Motorsports Park to bring viewers nationwide a front-row seat at the world's first Redline: Time Attack!Pounding the tarmac on Spring Mountain's new 3.1-mile road course in Pahrump, Nevada, Redline and Modified Mag are bringing one of Japan's classic motorsports...
auto insurance
Ira > First Redline:Time Attack! Presented by Hawk Performance Brake Pads to be featured on G4TV’s 'Street Furty' Television Series
Reserve Your Place for Student Loan Consolidation Before July 1 Interest Rate Hike
Quincy, MA (ContentDesk) June 21, 2006 -- On June 15, 2006, President Bush signed into law HR 4939, an emergency budget bill that included a provision for students and graduates with student loans to be able to consolidate their federal student loans with the company of their choice. This freedom of choice comes at a critical time, as graduates face a near-record average interest rate increase of 35% on student loans beginning July 1, 2006. Acting quickly can save graduates hundreds or even thousands...
Reserve Your Place for Student Loan Consolidation Before July 1 Interest Rate Hike color printers
Ira > Reserve Your Place for Student Loan Consolidation Before July 1 Interest Rate Hike