The substance of the Pension Protection Act is complicated. The Act was enacted to allow taxpayers some flexibility with regard to inherited pension and retirement funds. Many pension and 401(k) plans require non spouse beneficiaries to withdraw the funds within 5 years. Some plans require the money to be withdrawn within a year. With the new Act, non spouse beneficiaries are allowed additional flexibility and have planning options.
Beginning January 1, 2008, distributions from tax qualified retirement plans, tax sheltered annuities and section 457 plans can be rolled into Roth IRA's. In addition to IRA's, eligible retirement plans include qualified trusts, tax sheltered annuities and governmental 457 plans that can be rolled into a Roth IRA.
A rollover into a Roth IRA would not be a tax free transaction.
The Pension Protection Act allows for a direct rollover from a 401(k) plan into a Roth IRA. The old law required a temporary traditional IRA. The new law allows a streamlined approach to converting retirement funds into Roth IRA holdings. The new law should reduce paperwork and procedural errors.
The Pension Protection Act benefits non spousal beneficiaries. The distribution from the eligible retirement plan into an IRA is a tax free transaction. The old rules would not allow a non spousal beneficiary to make that transfer. The amended law allows the transfer of funds into an inherited IRA. An inherited IRA allows the non spousal beneficiary to make distributions in compliance with the required minimum distribution rules for a non spousal beneficiary.
The Pension Protection Act requires 3 planning considerations: