Unfortunately, there are other ways for an inherited 401(k) to self-destruct. And once again the transgressions might seem on par with a kid not sending a thank-you to Grandma for a birthday gift. For example, the IRS can grind your inherited windfall into pulp if the workplace cuts a check to a son or daughter (or any beneficiary besides a spouse) to empty the workplace account. Even if the child deposits the check into a properly titled IRA, the IRA could implode. That's because only spouses can complete a rollover. Everybody else must rely on a trustee-to-trustee transfer.
With a trustee-to-trustee transfer, you will never have the 401(k) proceeds arrive in your mailbox. Instead, the workplace must mail the assets directly to the financial institution where the IRA account is waiting.
Some companies, however, can't or won't get involved in making sure that the correct transfer is completed. There is a way, however, to sidestep pigheaded companies. If the workplace insists on sending a beneficiary a check, he or she can request that it be properly titled so that the retirement account is protected. The company would have to issue the check in a way that would ensure that it's deposited only in the inherited IRA account.
Using the example above, here is what it would look like: "National Bank as trustee of Mary Smith IRA (deceased Sept. 1, 2007) f/b/o John Smith."
The only people who don't have to worry about following these picayune rules are spouses. An individual who inherits a spouse's 401(k) or IRA can move the money into his or her own IRA.
And here's one final warning: If a worker is married, the beneficiary of his or her 401(k) legally must be the spouse. If you've designated children from a first marriage on your beneficiary form, your wish will be valid only if your current spouse signs a waiver relinquishing his or her rights to the cash. |