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Ask the Expert: Transferring a 401(k) to someone else

My question is about 401(k)s. I'd like to give mine to my children while I am alive; is it possible to turn it over to them somehow, with them being responsible for paying the future taxes?

You can't transfer your 401(k) account to your children during your lifetime. With your spouse's permission, however, you can designate them to inherit it when you die. (Why do you need permission? Because your husband or wife is legally entitled to be your 401(k) beneficiary. You need a signed spousal waiver to name anyone else.)

Only in a divorce can money be transferred from your 401(k) to another person during your lifetime without triggering taxes. In response to a qualified domestic relations order (QDRO) issued by a divorce court, your 401(k) plan administrator will divide your account between you and your former spouse. The division makes your ex a plan participant in his or her own right. (QDROs aren't available for IRAs, but tax-free transfers can be done between the IRAs of divorcing spouses in accordance with the terms of a divorce agreement.)

Alternatively, a divorce court can order that part of your 401(k) be paid out as taxable distributions to your former spouse and/or to your children. Distributions to your ex are taxable to your ex; but you pay the taxes on court-ordered distributions to your kids, says Ed Slott, a Rockville Centre tax accountant.

On the bright side, your anxiety about future taxes on your 401(k) may be exaggerated. Even after you retire, you won't owe taxes on the entire balance — only on distributions from the account. The principal will remain tax-deferred, whether you leave it in the 401(k) plan or transfer it to a traditional IRA.

The bottom line

You can't transfer your 401(k) account to your kids before you die.

More information

nwsdy.li/401KHelpCenter

nwsdy.li/IRS401kResource

TO ASK THE EXPERT Send questions to Ask the Expert/Act 2, Newsday, 6 Corporate Center Dr., Melville, NY 11747, or email act2@newsday.com. Include your name, address and phone numbers. Questions can be answered only in this column. Advice is offered as general guidance. Check with your own consultants for your specific needs.

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