Pension Protection ActPension Protection Act

Inherited IRAs — Before the PPA, a spouse who is the beneficiary of qualified plan or IRA benefits could roll the benefits over into his own IRA, remain the beneficiary, or transfer qualified plan benefits to an inherited IRA in the decedent's name with the spouse as beneficiary (as permitted under Private Letter Ruling 200450057).

A beneficiary of an IRA or a qualified plan, even if not the spouse, could stretch distributions over his life expectancy.

Even so, many qualified plans didn't allow these stretchouts. Instead, many forced beneficiaries to withdraw the benefits all at once, or within a short period of time following the participant's death. Even if the plan permitted stretchouts, the plan itself could terminate during the beneficiary's lifetime.

Until now, a beneficiary other than the spouse could not transfer the benefits to an IRA. One solution was to take the benefits in the form of an annuity, in which case the benefits would not be taxable until the annuity payments are received. However, annuities have limited investment choices, add an additional layer of expenses, and are not always available under a plan.

The PPA changes the landscape dramatically. It makes it so that plans must allow even a nonspouse beneficiary of a qualified plan to rollover the benefits into his own IRA or to transfer the benefits to an inherited IRA. The provision is effective for such rollovers and transfers beginning Jan. 1, 2007. Once the money is out of the plan, a beneficiary may stretch the inherited IRA benefits over his life expectancy.

It applies to qualified plans, governmental Internal Revenue Code Section 457 plans, and tax-sheltered annuities. The Internal Revenue Service is to issue regulations applying this provision to benefits payable to trusts to the same extent it applies to individuals.

Beneficiaries of qualified plans (other than spouses) who can wait until 2007 to take distributions should do so in order to take advantage of this provision.

Transfers of IRA benefits to charity — Because traditional IRA benefits are subject to both income and estate tax (with an income tax deduction under IRC Section 691(c) for the federal estate tax), some IRA owners name a charity as the beneficiary of some or all of their IRA benefits. However, upon reaching age 70 ½, traditional IRA owners have to begin taking distributions.

Before the PPA, an IRA owner could make a charitable contribution in an amount equal to the required distribution. But the deduction for the charitable contribution may not fully offset the income from the required distribution, due to the limitation on the charitable deduction, state income taxes, or other factors.

The PPA allows IRA owners over age 70 ½ to transfer directly from their IRAs up to $100,000 a year of their IRA benefits to public charities. These transfers will count toward the required minimum distributions (RMDs).

Charities have long been pushing to have Congress make it so that all of an IRA could be given directly to public charities. This measure is the camel getting its nose in the tent. Look for philanthropy advocates to lobby for that $100,000 to be increased.

This provision is effective for 2006 and 2007. IRA owners over age 70 ½ may wish to consider taking advantage of this opportunity.

Corporate-owned life insurance — Life insurance proceeds are generally exempt from income tax. As a result, some corporations have purchased life insurance on their employees, making the corporation the beneficiary. This move was controversial because often the employees weren't told about the purchase and the policies could reduce the amount of life insurance they themselves could hold on their own lives.