Prior to PPA, there was no way for a person to transfer money held in an IRA to a charity without first recognizing the contribution in income. To correct this, PPA allows for qualified charitable distributions (QCDs) from IRAs (excluding SEPs and SIMPLEs) to qualified charities for 2006 and 2007. A QCD can be made only if the IRA owner is age 701/2 or older, and it can be made to any IRS-qualified charity except donor advised funds, a supporting organization and certain private foundations. Because the contribution must be 100 percent deductible if paid from the owner’s non-IRA assets, distributions from the IRA may not be used for split interest charitable giving such as charitable remainder trusts, pooled income funds, or a charitable gift annuity. QCDs also count toward meeting the minimum required distribution rules. The exclusion of income for a QCD is limited to $100,000 per year.
Another significant change was made with regard to the treatment of death benefits. Prior to PPA, only the spouse of a qualified plan participant could roll over death benefits into an inherited IRA. PPA allows distributions after 2006 from qualified plans (and Code Sections 403(a) or (b) annuities, or a government Code Section 457 plan) to non-spouse beneficiaries to be transferred to an inherited IRA by a direct rollover. An inherited IRA must be titled in the name of the deceased participant for the benefit of the beneficiary. This change will allow such beneficiaries, who often were limited by plan provisions to receiving the benefits in a lump-sum distribution, to have the benefits paid to them under a life expectancy method that allows a longer deferral of distributions and a reduction of income tax owed. This rollover is not available if the benefits are payable to the participant’s estate or to a trust that does not qualify as a conduit trust.
Finally, prior to PPA, if a taxpayer wanted to transfer assets in a qualified retirement plan to a Roth IRA, the taxpayer first had to roll the plan benefits into a traditional IRA and then convert that vehicle into a Roth. Beginning in 2008, the qualified plan participant will be able to roll the plan benefits directly into a Roth IRA, provided that his modified adjusted gross income does not exceed a certain amount. The Tax Increase Prevention and Reconciliation Act passed earlier in 2006 eliminated the need to meet this AGI limitation for years after 2009.
At more than 900 pages, the PPA obviously covers a wider variety of issues than those listed here. But familiarizing yourself with the provisions pertaining to some of the more commonly used retirement planning tools will greatly benefit both you and your clients.