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Manage AGI To Keep Your Tax Breaks

That is, until the passing of the Pension Protection Act of 2006. Now non-spouses may bet a break as well.

Non-spousal heirs who receive a 401(k), 457, or 403(b) plan may roll over the funds into what is called an "inherited IRA." Although non-spouses must begin receiving taxable distributions from the inherited IRA in the following year, the payments may be spread over their expected lifetime. Thus, a young adult who receives funds from a grandparent's estate may be able to spread the income over to very long period of time and thereby continue to grow the account.

Traps to avoid. Of course, as with most tax breaks, there are certain traps to avoid. The timing of the rollover is critical, and the rules must be followed precisely. The money must transfer directly from the 401(k) to the inherited IRA without passing through your hands. Also be aware that retirement plans are not required to allow non-spousal rollovers. If necessary, you might consider a rollover into your own IRA first. IRAs that are passed on do not generate immediate distributions for either spouses or non-spouses.

The new non-spousal 401(k) rules add yet another tool to the estate planner's belt. But the process must be handled carefully. For details and assistance, give our office a call.

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