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A Costly Glitch For 401(k) Heirs: A law giving nonspouses a tax break doesn't always apply. How to protect your kids

Date: May 21, 2007
Author: Anne Tergesen
QUOTE: Children, siblings, unmarried partners, and other "nonspouse" beneficiaries have long been subject to onerous rules requiring them to cash out 401(k) inheritances within one to five years of the account owner's death. At that point, the heir would owe income tax on the entire account, since taxes had been deferred. The new law was supposed to change that by putting all beneficiaries on an equal footing with spouses, who have always been free to transfer inherited 401(k)s to an individual retirement account and stretch the withdrawals—and tax bills—over their own life expectancies. But a recent Internal Revenue Service ruling has advisers warning that the new law doesn't offer the protection they hoped it would.

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