Under current law only a surviving spouse can roll an inherited retirement plan (such as a 401(k) plan or profit-sharing plan) into his or her own Individual Retirement Account (“IRA”). Additionally, many company 401(k) and profit-sharing plans require non- spouse beneficiaries to take immediate lump-sum payment of account balances after an employee dies. This combination caused many non-spouse beneficiaries to get hit by an unexpectedly big income tax bill in the year they received a lump-sum distribution from the retirement plan (up to one-third could be lost to federal income taxes).

Thanks to the Pension Protection Act of 2006, which was just signed into law by President Bush, starting January 1, 2007, non-spouse beneficiaries will for the first-time ever have the ability to roll an inherited retirement plan into their own IRA. The benefit of “rolling” this money into an IRA is that a non- spouse beneficiary can postpone having to pay income tax on it all at once. Instead, just a small amount will have to be withdrawn each year, leaving the rest of the money invested inside the IRA where it can continue to compound and grow on a tax- deferred basis.

Here’s how it works: Suppose a woman dies early next year at age 69 with $1 million in her 401(k) plan. The plan requires that the account balance be distributed to beneficiaries within a year of the employee’s death. She had named her 38-year son as the sole beneficiary of the plan. Under the new law, the son can transfer that 401(k) money directly into an “Inherited IRA” for his benefit. By doing this, he can stretch out the IRA withdrawals over his life expectancy (approximately 45 years as determined under IRS guidelines), thus easing his income tax bite. If the new law hadn’t passed, the son would have had to withdraw the money within a year (as the company’s plan required) and pay income tax on the entire amount.

The new law is very specific and if you are a non- spouse beneficiary of a retirement plan you should make sure to comply with the following requirements:

1. Do not touch the retirement account you have inherited until at least next year (January 1, 2007) when this new strategy becomes available.

2. Insist that the Trustee of the retirement plan send the money directly to an “inherited IRA.” If the Trustee cuts you a check and tells you to deposit it into the IRA, you lose the ability to stretch out the withdrawals. You want the assets in the retirement plan delivered via what’s called a “trustee-to-trustee transfer.”

3. An “inherited IRA” is sometimes called a “beneficiary IRA.” In either case, it must be established in the decedent’s name, not yours. As odd as this sounds, the decedent’s name will be listed as the “owner,” with the proceeds payable to you as the beneficiary.

4. The inherited IRA should be a completely new IRA set up specifically to receive the balance in the retirement plan. Do not co-mingle the money from the retirement account with other IRAs you already have.

Of course, if you have any questions or would like assistance with transferring a retirement plan you have recently inherited into an inherited IRA, please contact us at Cox & Nici. You may also want to take this opportunity to ensure that your current beneficiary designations for your retirement plans, IRAs, life insurance policies, etc. are in accordance with your current estate plan.