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News: Rollovers By Nonspouse Beneficiaries

Rollovers By Nonspouse Beneficiaries
A provision in the Pension Protection Act of 2006 extends a favorable tax-planning option to nonspouse retirement beneficiaries, such as children or life partners.

A distribution from a qualified retirement plan, tax sheltered annuity or individual retirement arrangement is generally included in income and taxable for the year distributed. However, eligible rollover distributions may be transferred tax-free within 60 days to another plan, annuity or IRA. Under current pension law, similar rollovers are permitted in the case of a distribution to the surviving spouse of the plan participant or IRA owner, but not in the case of distributions to other persons.

Many retirement plans required distributions to be made within one year of the death of the plan participant. A surviving spouse could roll such a distribution over into a plan or IRA of his or her own and defer or spread out the distribution and payment of taxes. A nonspouse beneficiary, such as a child or significant other, was not permitted to make such a rollover and, consequently, could be hit with a large tax bill.

Under a key provision of the Pension Protection Act of 2006, a child or other nonspouse beneficiary who receives a retirement plan distribution can transfer it to an IRA. This allows the beneficiary to spread out the payment of the distribution and can ease the tax burden significantly. This provision is effective for distributions after December 31, 2006.

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