A Better Deal When You Inherit a 401(k)

Instead of being hit with a big bill, heirs can now spread the taxes over a lifetime.

Starting this year, if you inherit a 401(k) or other qualified company retirement plan from someone other than your husband or wife, you may be able to transfer the balance directly to an IRA. And that\'s a really big deal.

The new rule gives you a valuable opportunity to stretch your distributions -- and the tax bite -- over your lifetime while the investments continue to grow tax-deferred. Previously, only spouses could roll over an inherited company plan to an IRA. Everyone else usually ended up taking distributions in a lump sum or over a few years -- and paying substantial federal and state taxes just as quickly.

To get the full benefit, it\'s important for children, grandchildren, siblings and other named beneficiaries to follow the rules exactly, says IRA expert Ed Slott, a CPA in Rockville Centre, N.Y. That means you must transfer the money directly into a properly titled inherited IRA that\'s maintained in the name of the deceased -- for example, \"John Smith\'s IRA (deceased Jan. 1, 2007) for the benefit of Mary Jones, daughter.\"

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Mary Beth Franklin
Former Senior Editor, Kiplinger's Personal Finance