Inherited 401(k)s from non-spouses to get enhanced options

Non-spousal beneficiaries of retirement plans may now have enhanced options.

The following excerpts are from Anne Tergesen, New Rollover Rules for 401(k) Heirs, Wall St. J., Feb. 14, 2009:

As part of a recovery package enacted in December [2008], Congress has given other heirs of qualified plans the same favorable tax treatment previously reserved for spouses — specifically, the ability to defer taxes on the money by rolling it over into an individual retirement account. * * *

Children, siblings, domestic partners and other “nonspouse” beneficiaries of these accounts have long been subject to rules requiring them to cash out 401(k) inheritances within one to five years of the account owner’s death. At that point, the heir would owe income tax on the entire amount, since taxes had been deferred. * * *

In 2006, Congress enacted a law that was supposed to put all beneficiaries on an equal footing, since spouses have always been free to transfer inherited 401(k) money to an IRA. * * *

But under a 2007 ruling, the Internal Revenue Service gave employers the right to choose whether to amend their 401(k) plans to allow for these transfers. * * *

“Clearly, not all 401(k) plans did so, or Congress would never have enacted this new law,” says Ms. Christerson.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.