Helping You Take Ownership of Your Retirement Security

On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006 ("The Act"). The Act contains 907 pages, most of which are meant to shore up our nation's defined benefit pension system. However, the Act permanently extends provisions that were originally part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and could affect you directly. Several provisions you will likely consider good news.

They include:
Leveling the playing field

Two of the more common pension plans used by physicians are the Defined Contribution Pension Plan and 412(i) plans. These plans are complex and often misunderstood. Historically, one of the primary "selling points" of the 412(i) plans was the ability to defer more income into the plan each year. Under these new guidelines, conventional defined benefit plans may now exceed so-called 412(i) defined benefit insurance plans in terms of maximum funding allowances. When combined with the increase in audits of 412(i) plans, physicians should be very diligent in understanding the pros and cons of these two popular pension plans.
New Options for Non-Spouse Beneficiaries

Beginning in 2007, a non-spouse beneficiary (such as a child or grandchild) who inherits your 401(k), or other company plan balance, may transfer that plan balance directly to a properly set-up inherited IRA that can be stretched over their lifetime. This also applies when trusts are named as the plan beneficiary. The transfer, however, must be done as a direct rollover (trustee-to-trustee transfer) from the plan to an inherited IRA. Before this, a non-spouse beneficiary that inherited a company plan would usually end up having to pay tax on all of those funds in a few years and the stretch IRA opportunity would be lost.
For non-spouse plan beneficiaries, this is by far the most significant part of the new law. This single provision could have a huge dollar effect on non-spouse plan beneficiaries who can now stretch inherited company plan funds into an inherited IRA over the course of their lifetime. But be careful, this has to done correctly, if not, the benefit will be lost and the inherited funds will immediately be taxable.
This provision, however, does not change the rule that a non-spouse beneficiary cannot do a rollover. They still cannot do that. The transfer from the plan, although technically called a "rollover," must be a direct transfer (a direct rollover is also called a trustee-to-trustee transfer whereas the beneficiary never touches the inherited funds) or all bets are off. If a check is issued directly to the non-spouse beneficiary in his or her name, that is considered a rollover and the entire amount of the distribution will immediately be taxable because a non-spouse beneficiary cannot do a rollover. The transfer must go directly from the 401(k) or other plan to the properly titled inherited IRA. If it goes to the non-spouse beneficiary's own IRA or to a non-IRA account by accident, the distribution is taxable and the new law will not help preserve the stretch IRA. Inheritors must be especially careful here to ensure that all transfers under this provision are done exactly right. The direct transfer must go to a properly titled inherited IRA, which means the inherited IRA must be maintained in the named of the deceased plan participant "Dad IRA (Deceased February 10, 2007) FBO, Son."

Direct Rollovers to Roth IRAs

Beginning in 2008, distributions from qualified plans, 403(b) plans and governmental 457 plans may be rolled over directly to a Roth IRA. Previously, assets could only be rolled over into a traditional IRA and then converted to a Roth IRA. Also, if you have an adjusted gross income more than $100,000, you are not eligible to convert to a Roth IRA. Those restrictions disappear as of January 1, 2010 to allow anyone with an IRA the ability to convert to a Roth IRA. This presents a variety of opportunities, but an analysis of your situation is necessary to see if you would benefit.

Tax-Free Distributions for Charitable Purposes

IRA owners (excluding SEP and SIMPLE IRAs) who have reached age 70 1/2 can distribute up to $100,000 from an IRA, on a federally tax-free basis, as long as the distribution is made directly to a qualified charitable organization and the entire amount would otherwise be includable as income and tax deductible as a charitable contribution. Distributions made to donor-advised funds, supporting organizations and private foundations are not covered by this provision, which is effective for distributions made in 2006 and 2007 only.

Chuck Bowes, CFP, is a principal with Runyon & Bowes LLC, an investment management firm with offices in Walnut Creek and Newport Beach. Chuck can be reached at chuck@runyonbowes.com.