Seniors Win Big With New IRA Rules

Under the Pension Protection Act of 2006, there are some new items beneficial to IRA owners that the average IRA owner will miss:

First, if you leave your employer and you had a tax sheltered annuity (typically the type of plan at school districts and governments), you can roll both the pre-tax and after-tax amounts to an IRA. That way, the whole account can continue to grow tax deferred.

Next, the silly requirement to first roll your company account into a regular IRA and then into a Roth IRA has been dropped. Under the new rule, when you retiree, you can roll your company account directly into a Roth IRA (of course, you pay the income tax due and then the Roth will grow tax free). This is effective January 1, 2008.

The nonsensical prior rule that a non-spouse beneficiary of a company plan could not roll over the money had been dropped. Here’s an example. Dad worked for Chevron. He listed his son as beneficiary on his 401k. If Dad dies, the son can now do a trustee-to trustee transfer of Dad’s account into an inherited IRA. Previously, only a spouse could move money from a deceased’s 401k into an inherited IRA or their own IRA. The non-spouse beneficiary still cannot take possession of the money or else it will be taxed—there is no 60 day rollover provision.

There’s more good news about the above. Let’s say Dad died in 2003 and the son was subject to the 5 year rule which required that the IRA be emptied by 2008. Now, the son can just do the rollover in 2007 (the rule is effective January 1, 2007) and take advantage of the new rule even though Dad dies a while back.

If you’re charitably inclined, it has always made sense to give IRA funds or retirement finds to charity. Since each dollar in a retirement plan is only worth 65 cents (after an assumed 35 cent tax), it’s always made sense to give retirement funds rather than non-retirement funds to charity. Previously, if you wanted to give a lifetime gift of your IRA funds, you needed to include the distribution from your IRA on your tax return and then show a charitable deduction. For limitation reasons, this was not always favorable.

Now, you can distribute up to $100,000 directly to a public charity and not show it on your tax return, provided you are also past age 70 ½ (this does not apply to transfers to foundations, donor advised accounts or charitable remainder trusts—only outright gifts to public charities). You would not show the IRA distribution or the charitable deduction.

This is really a rule for seniors because you must be age 70 ½ to use it and it helps people, typically seniors, that have the following issues/limitations: helps people who could not previously make full immediate use of the charitable deduction because of the 50% of AGI limitation, those who paid tax on social security income, those who had a limit on their itemized deductions and those that did not itemize deductions.

The best news is that these transfers to charity count toward the taxpayer’s required mandatory distribution. One more good thing—these transfers to charity are exempt from the normal “pro-rata” rule. Therefore, if the taxpayer has after--tax funds in their IRA, the transfers to charity are only from pre-tax funds and will not affect basis in the IRA. Beware, this rule is immediately effective and set to expire at the end of 2007!

Last, good for seniors, starting in 2010, the $100,000 MAGI limitation on Roth conversion is repealed. Therefore, retirees, for whom Roth conversions are most appealing, will be able to do a Roth conversion without limitation and also spread the tax so that half is paid in 2011 and half in 2012.

About the Author:

Larry Klein CPA/PFS, CFP®, Certified Retirement Financial Advisor™, Harvard MBA helps advisors help seniors. He is co-creator of the Advanced IRA Rollover and Distribution Training and creator of the Certified Retirement Financial Advisor designation and training. Over 20,000 financial professionals use his marketing and lead systems and attend his educational programs to obtain more and better clients, serve them better, increase sales. www.financial-speaker.com