The Pension Protection Act of 2006
Rollovers by nonspouse beneficiaries
Currently, nonspouse beneficiaries who inherit a participant’s 401(k), 403(b), or 457 plan account can’t roll those funds over to an IRA–rollovers are available only to spouses. And while the law generally lets nonspouse beneficiaries take distributions over their lifetimes after a participant dies, employer plans aren’t required to offer that option. Nonspouse beneficiaries are often forced to take a distribution from the plan sooner than they like, and sooner than the law requires. Starting in 2007, the Act fixes this problem by letting nonspouse beneficiaries roll over funds to an “inherited” IRA, allowing them to defer taxes by spreading distributions from the IRA over the maximum period the law allows.
Hardship withdrawals
Currently, if you participate in a 401(k), 403(b), 457, or nonqualified deferred compensation plan, you can (if the plan permits) make an in-service withdrawal if you, your spouse, or your dependents incur a financial hardship. Under the Act, your employer can now also let you make a withdrawal if your beneficiary incurs a hardship. This provision, along with the nonspouse rollover rule discussed above, may be especially helpful for domestic partners.
Direct rollovers to Roth IRAs
Under current law, if you receive a distribution from a qualified plan, 403(b), or 457 plan, you can’t roll those funds directly to a Roth IRA. You can, however, accomplish this indirectly by first rolling the funds over to a traditional IRA, and then converting the traditional IRA to a Roth IRA (assuming you meet the income limits for a conversion). Starting in 2008, the Act streamlines this two-step process, allowing direct rollovers from 403(b), 457, and qualified plans to Roth IRAs.
Phased retirement distributions
As the baby boom generation begins to retire, some experts are warning that employers may begin facing a shortage of skilled workers. To address this issue, some employers have established “phased retirement” programs that encourage you to continue working on a part-time basis.
You benefit by having a smoother transition from full-time employment to retirement, and your employer benefits by retaining the services of a talented employee. Starting in 2007, the Act supports these arrangements by allowing pension plans to begin paying benefits after you reach age 62, even though you’re still working part-time.
Repeal of sunset provisions
The Act makes permanent a number of important retirement and education provisions that had been scheduled to expire after 2010, including tax-free distributions from Section 529 plans, increased IRA and retirement plan contribution limits, catch-up contributions, Roth 401(k)s, and many others. The Act also makes the Saver’s Credit permanent.
Charitable contributions from IRAs
If you’re age 70½, the Act allows you to make charitable contributions of up to $100,000 per year directly from an IRA to a qualified charity in 2006 and 2007. These IRA distributions are tax free, don’t increase your adjusted gross income (AGI), and satisfy minimum distribution requirements.
And even more 2007 changes
In addition, beginning in 2007, the Act:
* Adjusts the income limits that apply to IRA contributions and the Saver’s Credit for inflation
* Applies the faster vesting rules that currently apply only to employer matching contributions to all employer contributions to 401(k) and other defined contribution plans
* Allows direct deposit of tax refunds to IRAs
* Requires certain plans that invest in employer stock to offer participants at least three alternative investment options
Your financial professional can provide you with additional information about this landmark legislation, and can help you determine how the new law impacts you.