Former President Bill Clinton, whose birthday was yesterday, was heard last week lamenting the fact that he was about to turn age 60. Don’t feel bad, Mr. President, there are another 3 million who will join you this year – part of the first entrants of the baby boom generation. While few of them have retired, they are certainly considering it.
While the financial industry is getting ready to capture those retirement dollars, the new Pension Protection Act of 2006 liberalized distribution and payment options. Some of which are:
- Direct Rollover to Roth IRA. Distributions from a qualified retirement plan generally can not be rolled over to a Roth IRA. The rollover had to be a 2-step process. First, from the qualified retirement plan to a traditional IRA and then to the Roth IRA. Beginning in 2008 a distribution from a qualified retirement plan can be rolled over directly to a Roth IRA provided the current Roth conversion rules are met.
- IRA Distribution to Charity. Amounts distributed from IRAs are generally taxed as ordinary income with charitable contributions deductible under special rules. For 2006 and 2007, a tax free distribution of up to $100,000 per year can be made from an IRA directly to charity if three conditions are met: 1) the donor is over age 70 ½ , 2) the distribution would otherwise have been taxable, and 3) the donation cannot be used to increase the allowable deduction for charitable contributions on an individual’s tax return.
- Hardship Rules. Hardship distributions from qualified retirement plans can only be made on account of a financial hardship of the participant. Under the new law hardship distributions from qualified retirement plans can be also be made on account of hardship of the participant’s spouse or dependent. The new law directs the Treasury Department to effectuate this change 180 days after the enactment of the law.
- In-Service Distribution. Pension plans cannot generally make distributions unless the participant terminates employment or reaches the plan’s normal retirement age which is usually age 65. Beginning in 2007, in-service distributions can be made to a participant who attains age 62 and continues to work.
- Rollover by Non-Spouse Beneficiary. Prior law did not permit a non-spouse beneficiary to rollover the participant’s benefit into an IRA. Beginning January 1, 2007, a non-spouse beneficiary can transfer inherited qualified retirement plan benefits into an inherited IRA and adopt tax treatment of the inherited IRA.
And many of the sunset provisions of the Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA) that otherwise would expired in 2010 have been made permanent. So for the foreseeable feature, there should be no uncertainty about the distribution rules. More about the provisions that are here to stay at a later date.