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2006 Tax Law Changes
Non-spouse beneficiaries of 401(k)s will receive equal treatment to married beneficiaries. The opportunity for non-spouse beneficiaries to inherit a 401(k) or other qualified plan, roll it into an inherited IRA, and take distributions of his or her lifetime. Until now, non-spouse beneficiaries had to take the distribution in a lump sum, or, at most, over five years. This is a tremendous benefit for unmarried partners.
Starting in 2010, the income restriction on Roth IRA conversions is eliminated. Currently, only taxpayers with gross income under $100,000 can convert regular IRAs to Roth IRAs. One of the great benefits of a Roth IRA is that you never have to take distributions and you can pass it to a child or grandchild, who can take distributions over his or her lifetime, all tax-free. In addition, Roth 401(k)s can be converted directly to Roth IRAs.
529 College Savings Plan distributions are made tax-free permanently. Until now, distributions would have become taxable starting in 2011.
Employers will automatically enroll employees in 401(k) plans unless the employee specifically opts out.
The increased AMT exemption amounts will remain in effect in 2006. This provision has been renewed each year since it was enacted in 2003.
Lower capital gain and qualified dividend tax rates of 15% are extended through 2010. Previously, the lower rates were to have expired in 2008.
Elimination of reduced tax rates for children age 13 to 18. Previously, investment income reported by children older than 13 was taxed at the child's individual tax rate, normally lower than their parents' tax rate. Beginning in 2006, the investment income of a child up to age 18 is taxed at the highest marginal rate of the parents, i.e., added "on top" of the parent's income and taxed at the parents' applicable rate.
Effective for 2006 and 2007, taxpayers older than 70.5 may make tax-free contributions to charity from an IRA and exclude the amount of the distribution from taxable income. The contribution will qualify as the IRA owner's "required minimum distribution".
