Within the scope of an investment portfolio, the commonplace
401(k) may seem to be a simplistic account. But it’s not, especially when it
comes to estate and legacy planning. The named beneficiary on the plan will inherit
your 401(k) regardless of your will’s instructions. And from there, a spectrum of
various choices emerge based on a plethora of different variables.

First off, you can’t name anyone other than your spouse as
the beneficiary unless you get your spouse to sign off on a form that says it’s
OK. This rule is designed to protect a spouse from a partner who is considering
a divorce and tries to put all of his or her financial accounts under his or
her own name before announcing this intention.1

If you inherit a 401(k) from your spouse, what you decide to
do with it and the subsequent tax impacts may depend largely on your age and
whether or not your spouse had started taking required minimum distributions (RMDs)
before he or she died. In general, you may (1) choose to leave the money in the
plan and take distributions; (2) transfer the funds to an inherited IRA; or (3)
transfer the money to your own IRA.2

If you are a non-spouse beneficiary of a 401(k) plan, the
rules have changed recently. In late 2019, Congress passed legislation that limited
a strategy called the “stretch IRA.” This strategy was particularly popular
among people who had saved a substantial amount of money in their retirement
accounts. It used to be that this type of beneficiary could potentially take
distributions from the account throughout decades, based on the beneficiary’s
age and life expectancy.3 This meant that those assets could
continue growing tax-deferred indefinitely.

Now, as a result of the SECURE Act, most new non-spouse
beneficiaries must fully distribute all the account’s inherited assets in 10 years
or fewer after the death of the original account holder. If an account owner
had previously set up a trust to be beneficiary of a qualified account prior to
the SECURE Act, the new rules could lead to undesirable results. If you have
such a trust as the account beneficiary, it’s important to have it reassessed
to make sure the language doesn’t negatively impact the trust’s beneficiaries
or create a tax disadvantage.4

There are more factors related to inheriting a 401(k) plan
than just the recent SECURE Act provisions, including whether or not the
account owner had reached the required date to start taking RMDs before death.
The exact date depends on whether the account owner was still working at the
company, had retired before age 70 ½ or was working at a different company.5

Suffice it to say that many things related to an inherited
401(k) are complex. And, while there are effective strategies, they can be complex,
too. For example, you could decide to take advantage of spousal beneficiary strategies
instead of naming a non-spouse. This might include the surviving spouse gifting
the residual RMDs to other heirs or contributing that income to a taxable
account and naming those heirs as beneficiaries upon her death, which may offer
a strategic tax advantage.6

In short, estate and legacy planning is complicated business
— even for something that seems straightforward, like a 401(k) plan. We can
work with your estate planning and tax professionals to help you address these
issues.

Content prepared by Kara Stefan
Communications.

1 Rebecca Lake. SmartAsset. Oct. 22, 2019. “A Guide to
Inheriting a 401(k).” https://smartasset.com/retirement/inherited-401k. Accessed Feb. 24, 2020.

2 Ibid.

3 Greg Iacurci. CNBC. Dec. 17, 2019. “Lawmakers are
killing this popular retirement tax break for the wealthy.” https://www.cnbc.com/2019/12/17/lawmakers-may-kill-this-popular-retirement-tax-break-for-the-wealthy.html. Accessed Feb. 24, 2020.

4 Alessandra Malito. MarketWatch. Jan. 9, 2020. “Inheriting
a parent’s IRA or 401(k)? Here’s how the Secure Act could create a disaster.” https://www.marketwatch.com/story/inheriting-a-parents-ira-or-401k-heres-how-the-secure-act-could-create-a-disaster-2019-12-26. Accessed Feb. 24, 2020.

5 Rachel L. Sheedy. Kiplinger. May 30, 2019. “Inherited
401(k)s: 6 Questions Heirs Need to Ask.” https://www.kiplinger.com/slideshow/retirement/T001-S004-inherited-401k-6-questions-heirs-need-to-ask/index.html. Accessed Feb. 24, 2020.

6 Rhian Horgan. Nasdaq. Jan. 30, 2020. “2 IRA Changes
to Consider Right Now, Thanks to the SECURE Act.” https://www.nasdaq.com/articles/2-ira-changes-to-consider-right-now-thanks-to-the-secure-act-2020-01-30. Accessed Feb. 24, 2020.

We are not permitted to offer, and no statement contained herein shall
constitute, tax or legal advice. Individuals are encouraged to consult with a
qualified professional before making any decisions about their personal
situation.

We are an independent firm helping individuals create
retirement strategies using a variety of insurance and investment products to
custom suit their needs and objectives. This material is intended to provide
general information to help you understand basic financial planning strategies
and should not be construed as financial or investment advice. All investments
are subject to risk including the potential loss of principal. No investment
strategy can guarantee a profit or protect against loss in periods of declining
values.

The information contained in this material is believed to be
reliable, but accuracy and completeness cannot be guaranteed; it is not
intended to be used as the sole basis for financial decisions. If you are
unable to access any of the news articles and sources through the links
provided in this text, please contact us to request a copy of the desired
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