Skip to main content

9.8.4 Rollover IRA & Pension Protection Act

A Rollover IRA is any IRA whose funds have been distributed and reinvested in another IRA within 60 days of distribution. The recipient must not take possession of the transferred funds - funds must be transferred directly.

This typically occurs when a person changes employers. The funds from the IRA through the former employer are "transferred" into another IRA, usually into the new employer-sponsored plan. Funds could also be transferred from one IRA into another higher yielding IRA if desired.

The entire amount does not have to be rolled over; however, the part that is not reinvested becomes taxable as income and subject to a 10% early distribution penalty.

A surviving spouse who inherits IRA benefits or benefits from the deceased spouse's qualified plan is also eligible to transfer inherited funds and establish a rollover IRA in his/her own name. The tax law now allows non-spousal beneficiaries to take IRA proceeds over their lifetimes, plus the lifetimes of their oldest named beneficiary.

Pension Protection Act of 2006

The Pension Protection Act of 2006 was signed by President George W. Bush on August 17, 2006. The President called the Act "the most sweeping reform of America's pension laws in over 30 years." The Act strives to improve the pension system and expand opportunities to build retirement nest eggs by:

  1. requiring companies that under-fund their pension plans to pay additional premiums;
  2. extending a requirement that companies that terminate their pensions provide extra funding for the pension insurance system;
  3. requiring that companies measure the obligations of their pension plans more accurately;
  4. Closing loopholes that allow under-funded plans to skip pension payments;
  5. Raising caps on the amount that employers can put into their pension plans, so they can add more money during good times and build a cushion that can keep their pensions solvent in lean times;
  6. Preventing companies with under-funded pension plans from digging the hole deeper by promising extra benefits to their workers without paying for those promises up front.
  7. Removing barriers that prevent companies from automatically enrolling their employees in defined contribution plans;
  8. Ensuring that workers have more information about the performance of their accounts;
  9. Providing greater access to professional advice about investing for retirement;
  10. Giving workers greater control over how their accounts are invested; and
  11. Making permanent the higher contribution limits for IRAs and 401(k)s that were passed in 2001, enabling more workers to build larger retirement nest eggs.

The Act also continues the Saver's Credit, which allows eligible persons to contribute to a 401(k) plan, qualified pension plan, or IRA and receive a federal matching contribution in the form of an income tax credit for the first $2,000 of their annual contributions.

Beginning in 2010, anyone, regardless of income, can convert funds from a 401(k) plan to a traditional or Roth IRA.

(You can read about the Act in its entirety beginning on page 248 of the Florida study manual.)