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Guarding Your Wealth for Senior Citizens
Pension Protection Act Affects Those Working or
Retired
One change may save
families hundreds of thousands of dollars
By Jeffrey D. Voudrie, CFP
 September
20, 2006 - The Pension Protection Act was recently passed by
Congress and signed into law. It is “the most sweeping reform of
America's pension laws in over 30 years.” Whether you’re retired or
still laboring to build your nest egg, the Pension Protection Act (PPA)
will affect you. Read on to find out how.
For those still working, the PPA forces a company
to fully fund its defined-benefit pension obligations, meaning a company
can’t promise benefits they can’t pay.
While this will make existing pension programs
stronger, it will also decrease the number of companies offering
pensions to their employees.
The PPA also makes permanent the increased
contribution limits that were passed in 2001. That means that employees
will continue to be able to set aside greater amounts in their 401(k)
and their IRA.
It means that those over 50 years old will continue
to have a ‘catch-up’ provision that increases their contribution limits.
One change in particular, though, has the potential
to save families tens, if not hundreds, of thousands of dollars. It is
the provision that will allow a non-spouse beneficiary to ‘roll’ money
out of a 401(k) and into an IRA. Let me explain.
Recently, I was contacted by a reader. He was
inheriting the money out of his deceased father’s 401(k). In the past,
this would mean that he would have to take all the money out and pay
taxes on it. When money comes out of a 401(k) it is taxed just like your
salary or wages. If there was $500,000 in the 401(k), he was going to be
taxed as if he had a job making over $500,000 that year.
He would end up losing as much as 1/3 of it to
taxes. Imagine finding out you were going to inherit $500,000 only to
learn that over $150,000 of it would be lost to income taxes!
If the reader was inheriting that money from his
father’s IRA instead, he wouldn’t have to pay any of those taxes right
away. When someone dies, money from his/her IRA can be rolled to an
‘inherited IRA’ and continue to grow tax-deferred. This is referred to
as ‘stretching’ the IRA.
If the person inheriting the IRA was in their 30’s,
this ability could turn a $50,000 IRA into one worth several million
dollars over their lifetime. The impact of this cannot be understated.
Yet it couldn’t be done with a 401(k) unless your spouse was the
beneficiary. Thanks to the new Pension Protection Act, now you can!
There are some specific rules that must be
followed. First, the distribution must occur after January 1, 2007. If
the company is willing to wait until after that date, my reader will be
able to roll his dad’s 401(k) money to an IRA and avoid the taxes.
Second, the money can’t be added to an existing
IRA. You have to set up a new inherited IRA. The inherited IRA must be
in the same name and have the same beneficiaries as the 401(k) account
that is being rolled into it.
Third, this can only be done if the beneficiary of
the 401(k) is a real person. For instance, it is an option if your
children are the beneficiaries, but isn’t an option if your ‘estate’ or
a trust is the beneficiary because an ‘estate’ is not a real person.
Fourth, the transfer must be done by direct
rollover. This means that the money must move from the 401(k) directly
into an IRA. So if the company wants to send a check to you, it must NOT
be made payable to you. It should be payable to the inherited IRA.
Unfortunately, banks and other 401(k) providers
aren’t up to date on these new provisions, so don’t be discouraged if
they tell you it can’t be done. Because just having one detail out of
place can negate an inherited IRA, consult your CPA to make sure the
details are handled correctly.
For those who have existing 401(k)s, verify who
your beneficiaries are and make any necessary changes. Choose actual
people, instead of trusts or estates. And in your important papers, make
sure to inform your heirs they have the option to stretch that money in
an inherited IRA.
If you have a specific question or would like more
information give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Please
visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive.
Guarding Your Wealth for Seniors are
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For booking information, email e-mail
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