PENSION LAW UPDATES:
The Pension Protection Act of 2006 ("PPA")
In an effort to strengthen the private pension system, the Pension
Protection Act (PPA) of 2006 was signed into law in August 2007. The Act
contains a number of new provisions that mostly come into effect in 2007
onward and that cover pension funding, participation education, plan
terminations, employee benefits, and other important retirement-related
areas.
The PPA is the
most comprehensive piece of pension legislation passed in 30-years, and
updates many of the original regulations set forth in the groundbreaking
Employee Retirement Income Security Act (ERISA) of 1974.
The PPA places more responsibility on individuals to plan their financial
futures, and the following covers certain key aspects of this new Law
which are important for you to consider.
Here are few key provisions in the new PPA:
Direct Rollover of
Retirement Plan Assets to a Roth IRA
Effective January 2008,
if individuals meet the income requirement for conversion, they will be
able to roll over assets from their employer retirement plan directly to a
ROTH IRA without first converting to a Traditional IRA; however, to do
this, individuals will need to report the full amount of the pre-tax
dollars rolled over as income for the year the rollover takes place, and
pay any due taxes.
Opportunity:
This is an excellent
opportunity for those who have a 401(k) plan with a high level of
after-tax contributions. In the past, individuals had to roll into a
Traditional IRA and then convert to a ROTH IRA. The amount being
converted was pro-rated (pre-tax and after-tax) based on their total IRA
assets, so the amount of after-tax dollars going to the ROTH was greatly
reduced - that no longer has to occur.
Non-spouse Beneficiaries
Can Roll Inherited Retirement Plan Assets to an IRA
After December 31, 2006,
non-spouse beneficiaries of retirement plans will be able to roll over
plan assets into an IRA and continue deferring taxes on the rollover
assets. The rollover must be a "direct rollover" (trustee-to-trustee).
The new account must be titled and maintained as an Inherited IRA, (e.g.
titled as "The John A. Doe Inherited IRA" - where the Doe is the original
owner of the IRA, not the non-spouse beneficiary), including taking of
required minimum distributions. Taxes will be paid only when assets are
withdrawn.
Opportunity:
Many individuals have
non-spouse beneficiaries (children for example) who decide to leave their
401(k) account with their previous employer. These beneficiaries will now
be able to roll these accounts to a beneficiary IRA and possibly
consolidate them with other inherited qualified beneficiary assets they
receive from the same individual. This is an opportunity for those who
include non-spouse beneficiaries.
Federally Tax-free
Distributions to Charities
For 2006 and 2007 only,
individuals age 70 or older, can make a federally tax-free contribution of
up to $100,000 per year to a qualified charity. The individual does not
need to itemize and the contribution will count toward meeting the
required minimum distribution. The contribution must be made directly
from the IRA to the charity and the amount cannot be counted as a
tax-deductible charitable contribution.
Opportunity:
This is a great
opportunity for individuals who want to see the benefits of their
charitable contribution while they are still living. Donors can avoid
paying tax on the contribution, and still meet their required minimum
distribution.
For a complete view of all of the
PPA, including updates,
CLICK HERE
for the Department of Labor
website.
See our
Hybrid
Pension Plans page for
novel ways of maximizing plan design efficiencies to favor Business Owners
