Retirement Saving Plans Take Many Forms
Byline: Rob Smith
Saving for retirement takes many forms. A significant element of a retirement plan often includes an employer sponsored retirement plan, such as a profit sharing plan, a 401(k) plan or a 403(b) plan.
These retirement plans often accumulate significant assets and may represent a large portion of an individual's total assets.
An often-overlooked aspect of these retirement plans is the naming of a beneficiary. Frequently, and more often than not, appropriately, the spouse is named as the beneficiary.
Naming an appropriate beneficiary is important because it determines who will receive the assets upon the death of the participant.
Spouses named as beneficiaries of IRA and employer plans typically enjoy a great deal of flexibility when faced with distribution options due to the account holder's death. They usually can roll the funds to their own IRA, keep the funds in the existing plan, begin taking systematic payments from the plan or cash in the account pay income taxes.
Naming a beneficiary who is a non-spouse may present less than desirable options upon the death of the participant.
Revisions to tax regulations earlier this year, simplified payout options for beneficiaries of IRA accounts. But, in many cases, less flexibility is permitted in employer sponsored plans.
Non-spouse beneficiaries are not permitted to rollover the funds in the account to their own IRA. They need to begin distributions within one year following the account holder's death or distribute the entire account within five years of death.
Taking a distribution of the entire account may result in the beneficiary paying significant income taxes immediately. However, spreading distributions out permits non-spouse beneficiaries of an IRA to "stretch out" the distributions from the IRA. …