Few issues are more critical to retirement planning success that proper care and handling of IRA Distribution requirements. Now, more than ever, you need an investment advisor and wealth manager with proven expertise in retirement distributions and income planning. In its most sweeping and massive pension legislation in 30 years (the Pension Protection Act of 2006), Congress has put Americans on alert that when it comes to planning for a secure retirement, they are on their own.

Even though the law is called the “Pension Protection Act,” the result will be exactly the opposite as far as traditional, defined-benefit pension plans are concerned. Fewer companies will be able to provide pensions in the future. Companies are emphasizing defined-benefit plans, like the 401(k), which leave workers responsible for ensuring that they have adequate funds for retirement and expose them to the quirks of the financial markets. However, new rules in the Act allow you to build and protect your own retirement.

The Pension Protection Act of 2006 contains over 900 pages of provisions designed to strengthen the ailing federal pension insurance program and protect company employee pensions, which are on life support at best. Included in the new tax act are IRA and plan provisions that create new retirement planning opportunities for people to put more retirement money away and keep it growing tax deferred. It appears that Congress finally realized that you are on your own when it comes to retirement security, and purposely created more flexible and liberal retirement plan provisions. Summarize below are some of the key provisions of the Act.

Tax relief for non-spouse heirs
Before the 2006 Act, non-spouse beneficiaries were not allowed the same benefits as a deceased person's spouse. Children, siblings, and any other non-spouse beneficiaries were not permitted to “roll over” assets they inherited from a retirement account into an IRA. Rather than maintaining the tax-deferred status of inherited retirement assets, non-spouse heirs were forced to take a lump-sum distribution and pay ordinary income tax.

Beginning in 2007, a non-spouse beneficiary (like a child or grandchild) who inherits your 401(k) or other company plan balance can transfer that plan balance directly to a “properly titled inherited IRA.” Assuming the transfer is properly executed, this new provision allows a non-spouse beneficiary to withdraw only the minimum required amounts over his or her lifetime, extending the tax deferral and increasing the amount of the inheritance over that time.

This single provision could have a multi-billion dollar effect on non-spouse plan beneficiaries who can now stretch inherited company plan funds in an inherited IRA over their lifetimes. But be careful. This has to be done correctly or else the benefit will be lost and the inherited funds will be immediately taxable.

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, where 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 a rollover and the entire amount of the distribution will be immediately taxable.

Inheritors and financial advisors must be extra careful here to make sure 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.”

Applies to trusts, too
The rule also applies when trusts are named as the plan beneficiary. Of course the trust must meet all the regular IRS requirements for a see-through trust in order to maintain the stretch IRA. A properly titled inherited IRA must still be set up though to receive the transfer from the plan and then required minimum distributions will be paid from the inherited IRA to the trust.

Charitable IRA rollovers: (qualified charitable distributions)

The Pension Protection Act of 2006 permits individuals to contribute up to $100,000 from an individual retirement account (IRA) directly to a qualifying charity, without recognizing the assets transferred to the qualifying charity as income. You receive no tax deduction but you also do not have to report the income.

You may have a tax-infested IRA that may be beneficial to give to a favored charity. This new provision allowing Qualified Charitable Distributions only applies though to IRA owners age 70 1/2 and over, and only applies to outright IRA gifts to charities and not gifts made to grant making foundations, donor advised funds or charitable gift annuities. Better move fast on this one since, unlike the other provisions of this Act, this one expires after 2007.

The big incentive here is that the charitable donation from your IRA can satisfy your required minimum distribution. You won’t have to pay tax on the amount of your required distribution that you give to charity. This can lower your income and maybe even cut down the tax you pay on Social Security income, not to mention the loss of tax deductions, exemptions and tax credits that are lost when your income is increased.   If you normally make donations anyway, you should now make those donations from your IRA and reduce your income.

This provision is especially good for those who do not itemize their deductions (take a standard deduction) and would not normally be able to deduct gifts to charity (unless the donations were large enough to qualify for itemizing deductions). By not having to report the income from the IRA distribution, you effectively receive a deduction that would not otherwise have been available to you. There’s a technicality here though and financial institutions will have to gear up for it quickly so that your contribution qualifies. Under this provision, the donation must be made directly from your IRA to a charity without you or anyone else touching the money in between.

The only way this can be done, especially if you want to use this provision for making regular gifts from your IRA, is to have an IRA checkbook, which most people do not have. But an IRA checkbook in the wrong hands could be dangerous. If you end up taking the wrong checkbook to the supermarket, your groceries will cost a heck of lot more than you thought when you end up paying tax on the amount distributed. Also, since this provision ends after 2007, will the banks and other IRA institutions put a huge investment into offering IRA checkbooks and dealing with the related administration, questions and problems from customers who made mistakes with their IRA checks?

If there is no IRA checkbook, then the bank would have to make direct transfers from your IRA to a charity. They might do that for occasional large gifts, but will they do that for the everyday $10 and $25 gifts? We’ll have to see how the financial institutions react to this and their reaction time will have to be quick, since unlike many other provisions in this law, this one is effective immediately.

Roth conversions direct from company plans
Beginning in 2008, you can convert company plan funds (like your 401(k) funds) directly to a Roth IRA. The new law eliminates the current two-step process of moving plan funds into a Roth IRA. You still pay tax on the funds converted (except for after-tax plan contributions). This can create a tax loophole allowing you to by-pass the pro-rata rule that applies when you distribute after-tax funds from an IRA. Under the new law, the 401(k) funds never go to an IRA, but instead go directly to a Roth IRA. If the plan allows a partial distribution of only after-tax funds, they can all be converted tax-free. If the plan issues separate checks for the pre-tax and after-tax plan funds, then the pre-tax funds can be rolled to an IRA while the after-tax funds can be converted directly to a Roth IRA, tax free, by-passing the pro-rata rule.

Of course, you still must qualify for the Roth conversion, but remember that under the TIPRA legislation (The Tax Increase Prevention and Reconciliation Act, signed into law on May 17, 2006), beginning in 2010 everyone qualifies for a Roth IRA conversion. Plan distribution rules have not changed. You cannot take a plan distribution any time you wish. The plan must allow it. Some plans allow in-service distributions, which under the new law would be allowed to be converted directly to a Roth IRA.

Tax refunds can go to IRAs
Beginning with 2007 tax forms (for tax year 2006), part or all of your tax refund can go directly to your IRA or Roth IRA. Your annual IRA contribution will be made instantly. You no longer have to wait for your refund and then make your IRA contribution.

* Note: IRA Distribution Planning information is adapted from Ed Slott’s “IRA Advisor Newsletter,” which Mulligan Capital has been a subscriber to since the premiere issue in January 1998; and from www.irahelp.com.

Top reasons to get IRA planning assistance

Does handling retirement income sound a bit perplexing? If you said, “Yes,” you’re not alone. Many people find it beneficial to seek the advice of a competent financial planner. Here are just a few of the topics that can overwhelm many people, unless they have good counsel.

• How to begin required distributions at the right time.
• Understanding “Year of Death” required distributions.
• Roth IRA distributions.
• IRS reporting requirements.
• Eligible “roller distributions.” [do you mean “rollover?”]
• Inherited IRAs and spouses.
• Non-spouse inherited IRAs.
• The “five-year rule.”
• Splitting IRAs in a divorce.
• Early IRA withdrawals and IRC Sec.72t exceptions.
• Spousal rollovers.
• Sixty-day rollover relief.
• Creditor protection.
• Beneficiary selection.
• Custodial glitches and IRA wills.
• Understanding IRD for estates.
• Multiple IRA beneficiaries.
• Splitting IRAs.
• Conduit trusts and accumulation trusts.
• Net unrealized appreciation rules (NUA).
• Real estate rules for your IRA.
• Non-traditional IRA investments.