Historically, only spouses were permitted to enjoy the tax benefit of extending withdrawals from a deceased spouses 401(k) over the surviving spouse's expected lifetime. This extension stretched out the tax liability to coincide with the withdrawals. In the past, non-spouse beneficiaries could stretch out withdrawals over only a 1-5 year period. However, this past summer, Congress extended this spousal benefit to anyone who inherits a 401(k). The problem though, is it is up to the plan sponsor whether or not they want to permit this special treatment.
According to a recent BusinessWeek article:
According to a recent BusinessWeek article:
The IRS ruling lets employers choose whether to amend their 401(k) plans to make IRA transfers more widely available. While some companies, including IBM (IBM), Eastman Kodak (EK), and MetLife (MET), have done so, many have yet to consider the matter.
The best way to avoid problems? When you retire or leave a job, transfer your 401(k) to an IRA. That gets your nest egg out from under an employer's rules. You may also be able to take a so-called in-service distribution. A growing number of businesses let employees transfer money out of the plan while they're still on the payroll, says Ed Slott, (editor of Ed Slott's IRA Advisor). With an IRA, your heirs will be subject to the more favorable tax treatment.
A Costly Glitch For 401(k) Heirs
BusinessWeek
By: Anne Tergesen
May 21, 2007
http://www.businessweek.com/magazine/content/07_21/b4035102.htm
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