For those still working, the PPA forces a company to fully fund its defined-benefit pension obligations, meaning a company can't promise benefits they can't pay. While this will make existing pension programs stronger, it will also decrease the number of companies offering pensions to their employees.



The PPA also makes permanent the increased contribution limits that were passed in 2001. That means that employees will continue to be able to set aside greater amounts in their 401(k) and their IRA. It means that those over 50 years old will continue to have a 'catch-up' provision that increases their contribution limits.

One change in particular, though, has the potential to save families tens, if not hundreds, of thousands of dollars. It is the provision that will allow a non-spouse beneficiary to 'roll' money out of a 401(k) and into an IRA. Let me explain.

Recently, I was contacted by a reader. He was inheriting the money out of his deceased father's 401(k). In the past, this would mean that he would have to take all the money out and pay taxes on it. When money comes out of a 401(k) it is taxed just like your salary or wages. If there was $500,000 in the 401(k), he was going to be taxed as if he had a job making over $500,000 that year. He would end up losing as much as 1/3 of it to taxes. Imagine finding out you were going to inherit $500,000 only to learn that over $150,000 of it would be lost to income taxes!

If the reader was inheriting that money from his father's IRA instead, he wouldn't have to pay any of those taxes right away. When someone dies, money from his/her IRA can be rolled to an 'inherited IRA' and continue to grow tax-deferred. This is referred to as 'stretching' the IRA.

If the person inheriting the IRA was in their 30's, this ability could turn a $50,000 IRA into one worth several million dollars over their lifetime. The impact of this cannot be understated. Yet it couldn't be done with a 401(k) unless your spouse was the beneficiary. Thanks to the new Pension Protection Act, now you can!

There are some specific rules that must be followed. First, the distribution must occur after January 1, 2007. If the company is willing to wait until after that date, my reader will be able to roll his dad's 401(k) money to an IRA and avoid the taxes.

Second, the money can't be added to an existing IRA. You have to set up a new inherited IRA. The inherited IRA must be in the same name and have the same beneficiaries as the 401(k) account that is being rolled into it.

Third, this can only be done if the beneficiary of the 401(k) is a real person. For instance, it is an option if your children are the beneficiaries, but isn't an option if your 'estate' or a trust is the beneficiary because an 'estate' is not a real person.

Fourth, the transfer must be done by direct rollover. This means that the money must move from the 401(k) directly into an IRA. So if the company wants to send a check to you, it must NOT be made payable to you. It should be payable to the inherited IRA.

Unfortunately, banks and other 401(k) providers aren't up to date on these new provisions, so don't be discouraged if they tell you it can't be done. Because just having one detail out of place can negate an inherited IRA, consult your CPA to make sure the details are handled correctly.

For those who have existing 401(k)s, verify who your beneficiaries are and make any necessary changes. Choose actual people, instead of trusts or estates. And in your important papers, make sure to inform your heirs they have the option to stretch that money in an inherited IRA.