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New IRA Options Offer Flexibility for 2006 Retirement Savings; Even More for Those Planning for 2007 and Beyond(RIVERWOODS, ILL., January 2007) – While legislation passed last year impacted many types of retirement vehicles, perhaps most broadly affected are Individual Retirement Accounts with new laws making IRAs far more flexible and available to a broader range of individuals, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and pension law information, software and services (CCHGroup.com). And, taking it even a step further, Congress made it possible for you to direct the IRS to put all or part of any tax refund toward an IRA starting next year. Even better, the IRS on its own authority is permitting a direct deposit of refunds to up to three accounts, including IRAs, starting with 2006 returns. “IRAs hold trillions of dollars and are an important savings vehicle for millions of Americans. They don’t require that you work for an employer and the investment choices are not dictated by an employer’s plan,” said CCH Pension Analyst Nicholas Kaster, JD. “But some of the rules governing IRAs restrict individuals who want to contribute further from doing so. Some of these rules are being eased to encourage more taxpayers to use IRAs more often as a part of their retirement-savings strategy.” Even more important for the millions of procrastinating savers is that IRAs remain the ultimate last-minute tax reducer, as deductible contributions to an IRA can be made up until April 15 of the following year. Following is an overview of IRA tax considerations, including the new rules enacted under the Pension Protection Act of 2006. More Taxpayers Eligible to Contribute MoreFor 2006 and 2007, the maximum contribution individuals can make to an IRA is $4,000, increasing to $5,000 in 2008 and then adjusted for inflation starting in 2009. The IRA contribution limits and inflation adjustments were enacted under prior legislation and were made permanent as part of the Pension Protection Act of 2006. Additionally, those age 50 and over can make an additional $1,000 catch-up contribution to their IRA. This catch-up contribution also has been made permanent as part of the Pension Protection Act, but catch-up contribution limits are not adjusted for inflation. As a result, individuals who want to see their retirement savings go further should begin making catch-up contributions as soon as they are eligible. Moreover, a circumstance other than age will allow employees of bankrupt companies to make catch-up contributions. Special rules allow such employees to contribute an additional $3,000 but only in tax years 2007 through 2009. To be eligible to make this special catch-up contribution, they must have been a participant in their employer’s 401(k) plan six months before the bankruptcy case was filed and the employer must have gone into bankruptcy in the preceding tax year in which the employee is making the catch-up contribution. So, if an employee’s company went bankrupt in 2006, he or she could be eligible to make the $3,000 IRA catch-up contribution in tax year 2007. The Pension Protection Act also requires that income limits for contributions to both traditional and Roth IRAs be indexed for inflation beginning in 2007. For single filers who are active participants in an employer-sponsored plan (for example, a 401(k)), the adjusted gross income (AGI) restriction for contributing to a traditional deductible IRA increases $2,000 to $52,000 phasing out at $62,000 for 2007; for married couples filing jointly, where one is an active participant in an employer-sponsored plan, the AGI limit for a deductible contribution by the active participant is $83,000 phasing out at $103,000 for 2007 ($75,000 phasing out at $85,000 for 2006). Special income restrictions apply for the spouse who is not the active participant in an employer plan. In these instances, the AGI limit for the couple is $156,000, phasing out at $166,000 for 2007 ($150,000 phasing out at $160,000 for 2006). “For families where one spouse may be staying at home to raise children, this is a helpful provision,” said Kaster. The ability to make Roth IRA contributions is also restricted by an income phase-out limit. For joint filers the AGI phase-out range increases $6,000 to $156,000, phasing out completely at $166,000 for 2007 and increases $4,000 for single filers to $99,000 phasing out completely at $114,000. For lower income earners, the Saver’s Credit, which had been set to expire in 2007, has been made permanent under the Pension Protection Act, and the income limits are indexed for inflation. This credit is available to married couples filing jointly whose annual income is $52,000 or less for 2007 ($50,000 or less for 2006) and single filers whose income is $26,000 or less for 2007 ($25,000 or less for 2006). Depending upon income, the credit ranges from 10 percent to 50 percent with lower income equating to a higher credit. The Saver’s Credit also applies to 401(k) and other qualified retirement plans. Rollovers Increase IRA Saving OptionsAs part of the Pension Protection Act, direct rollovers from a qualified plan to a Roth IRA will be permitted starting in 2008. Allowing individuals to directly roll over funds from a qualified plan, such as a 401(k) plan, to a Roth IRA is a helpful simplification for taxpayers, Kaster notes. As of now, this transaction requires first opening up a traditional IRA, transferring the funds from the 401(k) to the traditional IRA and then transferring the funds a second time into the Roth IRA. Once in a Roth IRA, qualified distributions may be taken tax-free. “Additionally,” said Kaster, “for those looking to pass money on through inheritance, Roth’s are attractive because they do not require that the individual start taking distributions at age 70½.” However, despite the flexibility, a direct rollover from a qualified plan to a Roth IRA is not tax free. The amount rolled over is includible in income as a distribution, except to the extent it represents a return of after-tax contributions. Under current law, individuals who have an AGI of more than $100,000 are not allowed to convert assets from a traditional IRA to a Roth IRA. However, these income limits are eliminated, starting with the 2010 tax year. At that point, assuming no further change in the law, the income limits on making conversions would be lifted, while the income limits on making Roth IRA contributions would still be in place. “This creates an interesting planning opportunity for high income households,” Kaster said. “Such taxpayers could make a contribution to a nondeductible traditional IRA, which has no income limit. Then beginning in the 2010 tax year, they could convert their nondeductible IRAs into Roth IRAs, in effect circumventing Roth IRA income limits.” He noted that such taxpayers would owe taxes only on the earnings in the nondeductible account if that were their only IRA account. Otherwise, the tax would be based on the taxable portion of all IRA accounts held. In addition, starting in 2010, such taxpayers could continue to make a contribution to a nondeductible traditional IRA, and convert it to a Roth IRA the next day, realizing no taxable income. Qualified distributions from the Roth could then be taken tax free if the account has been open five years and the taxpayer is over age 59½. Special AudiencesNew legislation also allows certain active members of the military to count tax-free combat pay when determining whether they qualify to contribute to either a Roth or traditional IRA. Active reservists also are eligible for tax-free withdrawals from IRAs and other retirement plans. For tax years 2006 and 2007 only, taxpayers at least 70½ years old can also distribute tax-free up to $100,000 of their IRA balance each year to qualifying charitable organizations. Making Retirement Saving a Little EasierBeginning with the 2006 tax year, taxpayers will have the option of having their income tax refunds directly deposited into their IRAs, providing further opportunities for retirement savings. The IRS is offering a new form (Form 8888) that will allow the IRS to split the refund and directly deposit it in up to three accounts (e.g., checking, savings and IRA). “Many individuals are still of the mindset that a tax refund is a ‘bonus’ when, in fact, it just means you gave an interest-free loan to the government. Your best step would be to adjust your withholding so that you are not overpaying throughout the year and redirect those funds to your retirement saving, allowing them to start working as soon as possible,” said Kaster. “However, in absence of this, a direct deposit into your IRA may help individuals who otherwise have a hard time saving.” About CCH, a Wolters Kluwer businessCCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax and accounting law information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CCH® Tax Research NetWork™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. The company provides products and services for professionals in the health, tax, accounting, corporate, financial services, legal and regulatory, and education sectors. Wolters Kluwer has annual revenues (2005) of €3.4 billion, employs approximately 18,400 people worldwide and maintains operations across Europe, North America, and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. Its shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. For more information, visit www.wolterskluwer.com. -- ### -- nb-07-30
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