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Piershale: Navigating a retirement planning maze

Nobody likes unpleasant surprises, and we’re going to help you avoid one by discussing differences with the rules between company retirement plans and IRAs.

When saving for retirement, the two primary places where people save their money either is with an employer sponsored retirement plan, such as a 401k, or an individual retirement account (IRA). Did you know there are differences between the plans?

Don’t feel alone, most people don’t know. In this case, what you don’t know can hurt you.

Your 401k plan at work is governed by a set of rules under the Employee Retirement Income Security Act. That’s a mouthful, so let’s just call it ERISA. When you think of ERISA, think company sponsored retirement plans.

IRAs, however, are not covered under ERISA rules. They are individual plans – not employee plans – with their own set of rules.

Now, stay with me on this as I’m going to tell you about a 2011 ruling in Cajun Industries vs. Robert Kidder that affected these rules.

Leo Kidder was a participant in a 401k plan. After his wife Betty died, he updated his beneficiary form and named his three children as beneficiaries.

Leo then decided to get remarried to Beth Bennet Kidder. Six weeks after the couple marries, Leo dies.

Money still is in Leo’s 401k plan, which falls under ERISA rules. Under ERISA, the surviving spouse must be the beneficiary of the plan unless the spouse writes a waiver, which Leo and Beth did not do.

Houston, we have a problem.

As the named beneficiaries clearly on the plan’s beneficiary form, Leo’s children claimed they were entitled to the money in the plan. Wouldn’t you think the same thing?

But the court sided with the ERISA rules. They ruled because it is an ERISA plan, it must follow ERISA rules.

The children lost, and the surviving wife of only six weeks walked away with everything.

An IRA, however, doesn’t require a spousal waiver because it doesn’t fall under ERISA rules.

This doesn’t mean the ERISA law is bad. It has many rules to protect employees.

At the same time, many complex rules cover both company retirement plans and IRAs from proper beneficiary titling to understanding if a plan is deductible and knowing important deadlines to avoid penalties.

If you’re concerned about navigating this maze of rules without making a mistake, you may want to seek a financial professional who specializes in retirement planning.

• Mike Piershale, ChFC, is president of Piershale Financial Group. Send any financial questions you wish to have answered in this column to Piershale Financial Group Inc., 407 Congress Parkway, Crystal Lake, IL 60014. You also may fax them to 815-455-6895 or email mike.piershale@piershalefinancial.com.

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