Company retirement plans such as 401k’s, 403b’s, and 457 plans are tax deferred accounts that act just like an IRA when it comes to taxation. At age 70 1/2, unless one is still working and contributing to a retirement plan, you have to start taking distributions. But what about making sure the beneficiaries stretch out the account as an Inherited IRA? You will see the company plan in most cases does not accommodate this powerful planning strategy.
So what happens if the plan participant passes away while funds are still in their company retirement plan and they have not rolled the funds over to their own IRA? Here’s another question: What happens if the plan participant has not yet reached retirement age and is not permitted to do an inservice withdrawal? If there is a spouse, a majority of company plans allow a spousal continuation and they can either continue to keep the account within the company plan or roll it over to their own IRA.
But what happens if there is no spouse, or they have already passed away? Even though the Pension Protection Act of 2006 allows a beneficiary to do a trustee to trustee rollover into an inherited IRA by December 31 of the year the participant dies, the company plan is not required to do so.
Even if the plan does allow the inherited rollover now or in the future, it can be very tricky for the beneficiary do this properly. They have to swim upstream and instead of taking the normal beneficiary payouts, they need to do a trustee to trustee rollover to another custodian and set up the Inherited IRA. In most cases this will be unknown to them and also doing this correctly without making any mistakes that can trigger a taxation of the account can be a difficult task.
So instead of keeping your funds in a company retirement plan, in most cases it is better to roll the account over into your own IRA and set up planning ahead of time to insure the beneficiaries will take advantage of one the most important planning strategies to increase the family wealth over time.