New IRA Rules Affect Retirees

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.

Last, good for seniors, starting in 2010, the $100,000 MAGI limitation on Roth conversion is repealed.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.

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