One year later: the Pension Protection Act — how it may affect your retirement finances, tax strategies and estate planning
Aug. 17 marked the one-year anniversary of the Pension Protection Act of 2006, the special legislation designed to help working Americans bolster the state of their retirement savings. The Act, which includes numerous provisions, modifies certain tax laws to strengthen employer-funded pensions and is intended to enhance retirement saving programs for Americans. Certain provisions that take effect in 2007 — and others that will reach sunset by year end — are worth noting now because they could potentially affect the financial plans of investors in or near retirement. Anyone retired or on the cusp of retirement should review the changes.
New calculation may lower lump sum distribution amounts
Beginning in 2008, lump sum payments from defined-benefit pension plans will be calculated using a new, more complex formula. Because the new formula could reduce one-time retirement payouts, investors will want to clearly understand their distribution options before making an irrevocable decision pertaining to their defined benefit plan. The new formula only applies to a lump sum calculation and will not affect other options available to most pension participants receiving a lifetime stream of monthly payments based on pay and years of service. Retirees should consider the stability of their former employer as well as their own ability to manage investments independently when deciding whether to take a lump sum or monthly payments.
Qualified Charitable Distribution Provision expires at the end of 2007
If your birthday cake holds 70.5 or more candles, the Pension Protection Act provides you with a chance to make a very generous contribution to your favorite charity (providing it meets requirements) from your IRA. In 2007 only, you can donate up to $100,000 from your IRA plan without incurring a tax bill. But remember there’s no double dipping allowed because this special type of charitable contribution from an IRA plan is exempt from taxes; you cannot claim a deduction for the same contribution on your income tax form. Beneficiaries are not taxed on the rollover until the assets are withdrawn.
Rollovers from qualified saving plans are allowed for non-spouse beneficiaries.
Any non-spouse beneficiary, including a domestic partner, child, grandchild or sibling, may now be able to make a direct rollover of assets inherited from a qualified retirement plan, such as a 401(k) into an inherited IRA. In other words, rather than being subjected to plan rules that may require a non-spouse beneficiary to receive assets within five years and paying the applicable income taxes on asset distributions during this short time period, the non-spouse beneficiary may request the plan administrator directly roll the plan assets into an “inherited IRA.” Non-spouse beneficiaries cannot take a distribution from the plan and roll the amount over to an inherited IRA.
Also, some plans may not permit non-spouse beneficiaries to make a direct rollover to an inherited IRA. If the non-spouse beneficiary is able to make a direct rollover to an inherited IRA, the non-spouse beneficiary will only owe taxes on the amount of their annual required minimum distribution from the IRA or any amounts they decide to take in excess of the required distribution. This allows beneficiaries to stretch required minimum distributions over the course of their remaining life, assuming they meet the IRS requirements. As a result, the bulk of the money may remain invested in a tax-deferred account for a substantially longer period of time than what is usually available under most employer-sponsored retirement plans.
Make the right moves for your financial future
Before making decisions about pension payouts, charitable contributions and non-spouse beneficiaries, talk to your financial advisor and tax specialist. These professionals can help you assess how the new provisions will affect your finances and the choices available to help you make decisions that are right for your situation.
For informational purposes only. Should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor.
info: 704-987-9794 . email: lynn.j.davidson@ampf.com
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