Inheriting a 401(k) Retirement Account?
As of January 1, 2007 a new provision of the retirement laws allow anyone to inherit a 401(k) retirement account without immediate tax consequences. Previously, a spouse could inherit a 401(k) retirement account and put the money into his/her own retirement account without penalty, but anyone else, including children, were required to withdraw all funds from the account and pay taxes on the income within a matter of months. Under the new provision, any heir will be able to roll the money into an “Inherited IRA” and keep from paying the taxes immediately. By law you will still have to begin distributions by the age of 70 ½ but can spread the distribution amounts over your life expectancy.*
This tax break, created to reward lower-income workers who put money into a retirement account, has been made permanent. Eligible workers can claim a credit by contributing to a tax deferred retirement plan, which could cut up to $1,000 off filer's tax bill.*
What are the rules for giving away IRA money?
If you are 70 ½ or older, you can have pre-tax money from your IRA sent directly to a charitable organization. The main benefit for taxpayers is that the IRA gift keeps the donated amount out of the giver's taxable income tally, thereby lowing the filer's tax bill a bit. No double dipping is allowed. Since this distribution is tax-free, if you do itemize your taxes, you cannot deduct the gift on your Schedule A. The ability to keep the money out of your taxable income, however, should offset the deduction loss.*
*Please consult your tax adviser for specific information.
Are your 401(k) fees invisible?
The following excerpt is from PLANSPONSOR 6/06 pp. 23, 24
OUT OF SIGHT Are your 401(k) fees invisible?
With a 1% difference in fees a participant with 35 years until retirement and a current retirement plan balance of $25,000 could see a reduction of 28% in his/her retirement plan balance.
Places where you can find what fees you are responsible for in your retirement plan.
• Your retirement plan statement. You may find fees as a separate line item.
• Your plan's summary plan description (SPD). This will not detail the fees, but will tell you what the plan provides and how it operates. Consult your employer if you have questions on your company's retirement plan.
• Mutual fund prospectus or fact sheets. Here you will find the expenses of the mutual funds. [Example: A fund with a total operating expense of 0.79% (composed of a management fee of 0.42%, a 12b-1 fee of 0.35% and other expenses of 0.02%) will cost a $25,000 retirement plan balance $197.50/yr. (0.0079*$25,000)]
Fees That May Apply to Your Retirement Plan Account
- Plan Administrative Fees
- Mutual Fund Management Fees
- Individual Service Fees (ie: Loans)
(You can find more information online at www.dol.gov/ebsa/publications/401k_employee.html)
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