Deductible individual retirement accounts and Roth IRAs have been an attractive part of a retirement portfolio - if a taxpayer qualified for their use. The problem was that various income eligibility limits prevented many from taking advantage of IRAs.Nondeductible IRAs were generally available, but were often viewed as unattractive, since they offered only tax deferral on earnings - they offered no upfront deduction and required taxation at ordinary income rates on distribution and mandatory distributions starting at age 70-1/2.

The Tax Increase Prevention and Reconciliation Act of 2006, enacted in May, provided a key break by eliminating the income restrictions on rollovers to Roth IRAs starting in 2010. The Heroes Earned Retirement Opportunity Act, also enacted in May, made it easier for military personnel to contribute to IRAs. Now, the Pension Protection Act of 2006, enacted on Aug. 17, 2006, has added a whole series of provisions that should contribute to the attractiveness of IRAs.


The higher contribution limits and catch-up contributions enacted in 2001 that were scheduled to expire in 2011 have now been made permanent. Not only will the statutory increases now remain in the law, but continuing inflation adjustments will permit additional IRA contributions. For 2006, the IRA contribution limit is $4,000 and the catch-up limit is $1,000.

Also, a taxpayer affected by an employer's bankruptcy that meets the requirements specified in the PPA may be able to contribute an additional $3,000 per year to an IRA or Roth IRA in 2007, 2008 and 2009. While taxpayers age 50 or over utilizing this provision would not also be able to make an additional catch-up contribution, the additional contribution cap can help ease the retirement crunch caused by the just plain bad luck of working for the wrong employer.

Members of the armed forces are now able to include non-taxable combat pay in making the determination of whether they have enough compensation to contribute to an IRA, retroactive to Jan. 1, 2004.

Other taxpayers looking for a convenient source of funds for IRA contributions will, starting in 2007, be permitted to directly deposit tax refunds into an IRA account. Taxpayers planning to take advantage of this strategy should not file their tax returns at the last minute. The direct deposit into an IRA account must still occur by April 15.

The Saver's Credit, providing a credit to lower-income taxpayers of up to $1,000 for contributions to an IRA or other qualified plan, was also made permanent by the PPA. This additional money can form a key ingredient in an employer's presentation of retirement savings options to its employees.


IRA distributions are made more flexible under the 2006 legislation. Owners of IRAs or Roth IRAs who are 70-1/2 or older can give up to $100,000 tax-free directly from the IRA to a charity in 2006 and again in 2007. The provision only applies to distributions that would

otherwise have been taxable, which makes the provision of primary benefit for IRA owners, rather than Roth IRA owners.

Rather than being forced to take mandatory distributions taxable at ordinary income rates, IRA owners can give the money to charity without paying the tax. This may be particularly useful for taxpayers in states with an income tax on retirement income that do not allow a charitable deduction.

Military reservists and national guardsmen called to active duty for at least 180 days after Sept. 11, 2001, and before Dec. 31, 2007, may make penalty-free distributions from an IRA (as well as a 401(k) or 403(b) plan) and have up to two years to re-contribute the amounts and avoid paying income tax on the distribution.


The TIPRA eliminated the $100,000 adjusted gross income restriction on rollovers to Roth IRAs starting in 2010. This made it appear attractive for taxpayers to consider contributions to nondeductible IRAs, if they did not qualify for deductible IRAs, in the interim to build up funds to make the rollover in 2010. Rollovers made in 2010 only also qualified for a two-year spread on any tax due on conversion. It also became more attractive to consider a rollover of qualified plan money into an IRA in anticipation of being able to roll the IRA into a Roth IRA after 2009.

With the PPA, however, this two-step process will be unnecessary. Starting in 2008, qualified plan funds may be rolled directly into a Roth IRA without first passing through a rollover IRA. Until 2010, however, the $100,000 AGI limit still applies.

Under the PPA, the rules for rollovers to non-spouse beneficiaries have also been made more attractive. Non-spouses will, beginning in 2007, be permitted to roll over IRA distributions into an IRA tax-free and then apply the minimum distribution rules for non-spouse beneficiaries. This generally will permit distributions over the life of the beneficiary, rather than over a five-year period.

Also made permanent under the PPA is the ability to roll over an eligible distribution from an IRA into a qualified plan, a 457 deferred-compensation plan or a 403(b) plan. The PPA further prohibits states from reducing unemployment compensation for IRA distributions that are rolled over into another qualified plan or IRA.

Under the PPA, the provision in the law allowing the Internal Revenue Service to waive the normal 60-day rollover requirement from qualified plans and other IRAs has been made permanent. Nevertheless, taxpayers will still generally need to have a sympathetic case to qualify for a waiver.

IRAs in qualified plans

The PPA makes permanent the ability of a qualified plan to permit IRA contributions to be made along with qualified plan contributions and invested in the same options available under the qualified plan. These IRA contributions would be separate from and in addition to the qualified plan contributions, and the taxpayer would still be required to meet the normal AGI and other requirements for making the IRA contribution.

The PPA also makes permanent the ability of a 401(k) or 403(b) plan to offer a Roth IRA contribution option as an alternative to all or part of the employee contribution to the 401(k) plan. Although this was viewed as an attractive plan option, many employers held off adoption of the Roth IRA option, because the increased administration did not appear to be worthwhile for a provision scheduled to expire after 2010.

For many taxpayers, the eventual tax-free distribution from the Roth IRA will more than offset the loss of the tax deduction for the contributed funds that would otherwise have gone into the 401(k) plan.


Practitioners should make sure that their clients are aware of the many additional features and flexibility now associated with IRAs and Roth IRAs.

The changes may encourage contributions where none have been made in the past, or uses of contributed funds that would not have been possible in the past.

George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH, a Wolters Kluwer business.

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