Taking Advantage of the New Laws
As always, the devil is in the details, and numerous technical requirements must be met to utilize the new retirement laws effectively. For example, with regard to the IRA rollover law for non-spouses, a non-spouse who inherits a 401(k) plan may not roll the money into an IRA in his or her name alone. The account must be designated as an inherited IRA and titled accordingly: "Fred Flintstone, deceased, IRA for the benefit of Pebbles Flintstone" is one example. This type of long title can save you the excise tax that would be tacked on if the IRA’s title didn’t include the name of the deceased original IRA holder along with the beneficiary's name.
The Pension Protection Act of 2006 also took some of the uncertainty away from Roth 401(k), a hybrid retirement vehicle that was introduced in 1998 but set to expire in 2010. Under the new law, this retirement savings program has been made permanent. The conventional Roth IRA that permits tax-free growth and withdrawal of funds has some income eligibility limits; in 2006, those limits are $110,000 of adjusted gross income for unmarried individuals and $160,000 for married taxpayers. However, the Roth 401(k) has no such income eligibility limits. This change presents a tremendous opportunity for people who would otherwise not be eligible for a Roth IRA to take advantage of the wonders of tax-free compound growth through a Roth 401(k) at work.
In all, the Pension Protection Act of 2006 contains more than twenty opportunities for retirement savings. There’s something for everyone, but not everything will be appropriate for everyone. Headlines never tell the whole story, and with retirement planning the important word is "planning." Although some of these changes in the law seem simple, they all have conditions, advantages, and disadvantages. Make sure that you fully understand any retirement vehicle you may be considering, but don’t delay. The sooner you plan, the sooner you save.