IRS explains new retirement savings tax breaks for charitable distributions, non-spousal rollovers, and hardship
In 2006 Congress enacted major pension legislation, the Pension Protection Act of 2006 (PPA). The IRS has now issued the first wave of guidance on the new law. The law has several elective provisions that you can take advantage of.
Rollovers to charity
If you have an individual retirement account (IRA) and are at least 70 ½ years old, you can distribute up to $100,000 tax-free to a charity or charities. This tax benefit is only available if you make the distribution to charity in 2006 and 2007. Distributions can be made from more than one IRA, subject to the $100,000 limit. For a joint return, the limit is $100,000 per IRA owner. You will not receive a charitable deduction for the amount distributed to charity.
The law is particularly helpful if you can afford not to take any distributions and you want to avoid being taxed on the minimum distribution required after you turned age 70 ½. The benefit can be used for small distributions and could benefit you if you do not itemize your deductions.
If you are going to take advantage of this provision, you must make the distribution directly from the IRA to the charity. The distribution may be funneled through you, the IRA owner, only if the check from the IRA is payable to the charity.
Rollover on behalf of nonspouse beneficiary
In the past, amounts could not be rolled over tax-free from the IRA of a deceased person to an IRA for the benefit of a nonspouse beneficiary. Beginning for distributions after December 31, 2006, you can now make a tax-free rollover to an IRA for a nonspouse beneficiary. The rollover must meet the conditions for an eligible rollover and a direct rollover. The new rule allows an IRA to accumulate significant income over a much longer period of time because the IRA can now be passed to someone much younger than the surviving spouse.
Hardship Distributions
The PPA requires that plans be allowed to make hardship distributions to your beneficiary as well as your spouse or dependents. This rule applies to 401(k) plans, government annuity plans, and deferred compensation plans.
If you have any questions about any of these provisions, please give our office a call.
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