One year, one thousand pages and perhaps a few fistfights later, Congress last week approved the first comprehensive pension legislation in more than 30 years.
While more than half of the Pension Protection Act of 2006 focuses on how companies must handle their pension plans in the future, there's still plenty of alluring stuff for individual 401(k) and IRA savers. And there clearly is a trend here: Congress is further pushing the retirement savings onus onto us. In other words, don't count on the ailing Social Security system.
Truthfully, you shouldn't want the government in charge of investing your old-age money anyway. So empower yourself and take charge of your retirement. Here's how the bill helps you.
So Long, Sunsets
The biggest bonus of this bill is that our current retirement perks are now permanent.
Back in 2001, the Economic Growth and Tax Relief Reconciliation Act allowed for increased IRA contribution limits (up to $5,000 in 2008 and then inflation-adjusted until 2010), additional catch-up contributions for people older than 50 and other benefits to help us better save retirement money.
But according to that 2001 tax act, all that good stuff was scheduled to disappear after 2010 and revert back to the pre-2001 rules. That meant that the annual IRA (including the Roth IRA) contribution limits would fall back to $2,000 and the catch-up contributions would no longer be an option.
Thankfully, the new pension reform act made all the EGTRRA provisions that were scheduled to sunset permanent. That means that after 2010, IRA and Roth IRA contributions will keep increasing based on inflation, and the catch-ups are here to stay.
Another perk came on the 529 college savings plan front. Before this bill, the earnings from those plans were tax-free upon withdrawal for tuition, but only until Dec. 31, 2010. After that, bring on the taxes.
Fortunately, Congress had the good sense to make those distributions permanently tax-free. That's good news for the industry because many parents were hesitant to open 529 plans in fear that the perks were going to disappear.
And finally, the sun was supposed to set on the new Roth 401(k) that became
available in January. As a refresher, if your employer's retirement plan allows it, the Roth 401(k) let's you designate part or all of your 401(k) contribution to a Roth IRA.
So while your contributions to a Roth 401(k) are nondeductible (just like a regular Roth IRA), you'll get tax-free withdrawals in retirement.
But even though Roth 401(k)s can be a great retirement savings vehicle, many employers didn't bother to offerthem, again, because of the uncertainty. Now it's here to stay, so more people may be seeing this option at work.
Savings Plan Shifts
In another clear effort to encourage retirement savings, the bill allows employers to automatically enroll new employees into 401(k) plans. "So you'll actually have to take the time to opt out of the plan if you don't want to contribute," notes Nick Kaster, senior pension analyst at CCH, a provider of tax and business law information.
And if you leave your job with that employer, it will be easier to convert your 401(k) into a Roth IRA. The bill allows you to directly roll funds from a qualified retirement plan, like a 401(k), to a Roth IRA starting in 2008. Remember, in the past, you first had to roll that 401(k) money into a traditional IRA, because only IRA money could roll into a Roth IRA. Now you don't need that middle step.
The tax consequences don't go away, reminds Kaster. You'll still owe tax on the 401(k) money that's rolled into the Roth, but then that money and its earnings can grow tax-free.
There is currently a limit of $100,000 in adjusted gross income for Roth IRAs. But don't forget, as we reported
back in May, starting in 2010, the $100,000 rolloverceiling will also disappear. Then anyone can convert money to a Roth IRA.
Among the other miscellany are changes to the treatment of retirement plans upon a person's death. In the past, when a person died, his retirement plan could only be rolled into his surviving spouse's plan to avoid tax implications. Now this special treatment is extended to nonspouse beneficiaries, which is a big perk for same-sex couples.
Aside from these retirement changes, Congress tightened the tax rules surrounding donations to charities.
Now, every single cash contribution needs some sort of documented receipt. Whether it's yourbank statement or a note from the charity, you now need something in case of an audit.
In addition, if you're donating clothing or household goods, like furniture or appliances,they better be in "good condition" or the donation will be disallowed, says George Jones seniortax analyst at CCH. Of course, there's no real definition of "good condition" in the new bill, souse your best judgment.
And finally, if you're 70-and-a-half or older, you can donate up to $100,000 from your IRA to charity for tax years 2006 and 2007. But don't think you can withdraw the money, hand the charity a big check and be a part of a big philanthropic photo op. Your IRA trustee has to send the money directly, or you'll owe tax.
There are plenty of other new directives for corporations and their pension plans that we can delve into, but these are the rules most likely to affect your hard-earned savings. Get used to the changes; President Bush has said he plans to sign the pension protection act into law, so the moves likely are here to stay.
Tracy Byrnes is an award-winning writer specializing in tax and accounting issues. As a freelancer, she has written columns for wsj.com and the New York Post and her work has appeared in SmartMoney and on CBS MarketWatch. Prior to freelancing, she spent four years as a senior writer for TheStreet.com. Before that, she was an accountant with Ernst & Young. She has a B.A. in English and economics from Lehigh University and an M.B.A. in accounting from Rutgers University. Byrnes appreciates your feedback;
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