Pension Protection Act of 2006 -- IRA Provisions

Here is an overview of some of the IRA changes made by the Pension Protection Act of 2006:

• Tax-free distributions from IRAs for charitable purposes. If you are over the age of 70½ years, then you can exclude from gross income certain distributions of up to $100,000 from a traditional or Roth IRA if made to a tax-exempt organization to which deductible contributions can be made. The provision is effective for two years through 2007.

• Distributions for members of National Guard called to active duty. If you are a member of the National Guard and are called to active duty through the end of 2007, you can make a penalty-free distribution from your IRA or other qualified retirement plan as long as you re-pay the distribution within two years.

• Direct payment of U.S. tax refunds to IRAs. Beginning in tax year 2007, the IRS will allow you to make a direct deposit of your refund into an IRA. This is a convenience provision since it will not increase or reduce your total tax liability.

• Gross income phase-outs on IRA contributions will be indexed for inflation. Beginning in tax year 2007, the Adjusted Gross Income (AGI) phase-out limitations for traditional & Roth IRAs will be indexed for inflation. For tax year 2006 the IRA gross income phase out ranges are:
• Traditional IRA
• $50,000 to $60,000 for single individuals who are participants in an employer-sponsored plan
• $75,000 to $85,000 for married individuals filing a joint return who are participants in an employer-sponsored plan.
• Roth IRA
• $95,000 to $110,000 for single individuals
• $150,000 to $160,000 for married individuals filing a joint return

• Non-spouse beneficiaries of retirement plans can roll inherited proceeds directly into a new IRA. Under existing law, if you inherit the money accumulated in a retirement plan from anyone besides your spouse (i.e. your parent, aunt, uncle, sibling, etc.), then you must receive the funds in a lump sum and pay tax on the whole amount in the year you receive it. The new law will allow you, if you meet all of the requirements and elect to do so, to roll those funds into a new IRA under your name and continue deferring tax on those investments. If the person from whom you inherited the funds was subject to Required Minimum Distributions, then the new account will have those same requirements.
  

Pension Protection Act of 2006

The Pension Protection Act of 2006 was signed on August 17, 2006. It contains many provisions relating to the administration of retirement & pension plans, but it also has a number of tax provisions mixed in as well.

Over the next couple of weeks, I will give an overview of these topics:

• Individual Retirement Account (IRA) changes
• 401(k) plan changes
• General retirement plan distribution changes
• Charitable contribution changes
  

Hire your children & reduce your taxes

I advised a client today about the tax implications of hiring his children in his wife's unincorporated business. Here are the basics according to IRS Publication 15 (Circular E) Employer's Tax Guide (pg. 12):

• Children under the age of 18 are not subject to payroll taxes (Social Security & Medicare) on wages paid to them by their parent's unincorporated business.
• Children age 18 to 21 are not subject to federal unemployment taxes (FUTA) on wages paid to them by their parent's unincorporated business.
• The two rules above apply to a business run as sole proprietorship or as a partnership in which the only partners are the two parents.
• The rules above DO NOT apply to a corporation of any sort, even if the only shareholders of the corporation are the parents; however, our interpretation is that these rules DO apply to LLCs that are taxed as sole proprietorships or partnerships.

If you choose to use this strategy, please note these two points:

• This strategy only reduces payroll taxes & federal unemployment tax so your children might still be subjected to federal income tax when using it. Even so, this strategy can shift income from your higher tax bracket into your child's lower tax bracket and still provide an overall reduction in your tax burden.
• Your children need to provide legitimate services to your business for this strategy to stand up to audit. The services need not be highly-skilled, but they should be documented in a consistent manner.