Children who inherit a 401 (k) can roll it over into a Roth IRA

The IRS has given families a little more flexibility in handling a 401 (K) and pension plans.  According to an IRS announcement, children who inherit a 401 (k) or pension plan can now roll it over directly into a Roth IRA.

Before, a spouse who inherited a 401 (k) or pension plan could roll it over into a Roth IRA, but this was not true for a beneficiary other than a spouse, such as a child.  But now its true for any beneficiary. 

(In the past, a non-spouse beneficiary could roll over an inherited 401(k) or pension plan into a regular IRA, but not a Roth IRA).

What this means is that if parents want to leave money in a 401(k) or pension plan, rather than rolling it over into an IRA, t hey can do so without depriving their heirs of the ability to eventually have the money in a Roth IRA.  There are several reasons why a parent might want to leave money in a 401(k) or pension.  For example, in some states, assets in a 401(k) or pension are more protected from creditors than assets in an IRA, so doctors or other individuals with significant liability concerns might prefer such an arrangement. 

Also, in some states pension payments will not “count” against a person when determining Medicaid eligibility, but distributions from a Roth IRA will.

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