The Pension Protection Act 2006 (PPA) now permits you to convert your company retirement plan resources, including a 401(k), 403(b), and 457 plans, directly to any Roth IRA rollover 2011. Previously, one had to first convert a company plan into a traditional IRA and then convert that account to a Roth IRA. A non-spouse beneficiary can now also do the same direct transfer (inherited 401k balance to Roth IRA) but with some restrictions that would not apply to the account owner or his spouse.
A non-spousal successor of a company plan is only able to transfer the plan money straight into an 'inherited IRA' - either the standard IRA or a Roth IRA rollover 2011. If he chooses a traditional IRA to accept the inherited 401k funds, he cannot later convert that traditional IRA to a Roth IRA. So if he would like that money to go into a Roth account, he's got to make that decision at the time of inheritance to elect the Roth IRA rollover 2011.
Restrictions over a Non-spousal Roth IRA rollover 2011
No matter whether converting the 401k plan money to a traditional or Roth IRA, the non-spouse beneficiary must do a IRA direct rollover (e.g. trustee to trustee) from the employer to his designated 'beneficiary' IRA. He is not permitted to take possession of the funds even for a moment or else the entire amount is labeled a distribution by IRS and is taxable.
The non-spousal beneficiary has the identical conversion restrictions for a Roth Individual retirement account rollover 2011 as the proprietor did such as penalties with regard to withdrawals of earnings in the first 5 years, i.e. the 5 year rule. Also, like the owner or perhaps spousal beneficiary, he must have the money to pay for the taxes on the conversion from the pre-tax 401k to a Roth IRA.
Lastly -and unlike the owner or perhaps a spousal beneficiary - he's required to help make IRA minimum distributions (RMDs) commencing the year after the death in the owner. These Roth IRA distributions aren't taxed and are not assessed charges - regardless of age of named beneficiary (i.e beneficiaries do not need to be age 59 1/2 to take penalty-free distributions). But the amount of RMD from the Roth IRA rollover 2011 is based on the original life expectancy of the beneficiary once the RMDs begin - reduced simply by '1' each year thereafter.
For example, using the tables from the appendix of IRS publication 590, we see that a 30 year old beneficiary must distribute 1/53.3 of the IRA balance. The following year, he simply consults the same table for age 31 and finds he must distribute 1/52.4 of the balance.
Why convert to a Roth IRA rollover 2011?
If the non-spouse successor has the ability to pay the taxes to the Roth conversion and is still young, the conversion can be useful. If he's quite young -- say 30 - having an IRS Table I life expectancy of 53.3 years, his Roth IRA can potentially grow considerably due to relatively small RMD (less than 2% the first year). Therefore, assuming the account earns 5% while mandatory withdrawals are only 2%, the balance will continue to grow tax free for many years.
And maybe the best aspect of the Roth IRA Rollover 2011 for non-spouse beneficiary is that he is insulated against tax rate increases in the us needed to balance the budget as his withdrawals will always be tax free.
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions