October 2006

Rivaling War and Peace in girth, the recently enacted Pension Protection Act of 2006 adds significant heft to individual savings efforts.

The act, which received bipartisan Congressional support, is built on a foundation of measures intended to shore up traditional pension plans. Weighing in at more than 900 pages, the act is also loaded with benefits for traditional IRA, Roth IRA, employer-sponsored retirement plan and 529 savings plan investors.

The new act provides for:

Higher contribution limits
The big news: Higher contribution limits on retirement plans are here to stay.

Thanks to the act, contribution limits will not shrink back to 2000 levels in 2011. Instead, the current $15,000 limit on 401(k) plan contributions will be adjusted each year for inflation, starting in 2007. The contribution limit on IRAs, scheduled to increase to $5,000 in 2008, will receive annual inflation adjustments starting in 2009.

The act also permanently extended the life of so-called catch-up contributions, which allow savers age 50 and older to deposit extra cash in IRAs and 401(k) plans.

More flexible IRAs
The new act also offers increased versatility in IRAs.

For example, starting in 2008, investors will find it easier to convert qualified retirement plans and annuities into Roth IRAs, provided certain conditions are met.

In the meantime, current traditional IRA or Roth IRA account holders age 70 1/2 or older may enhance their philanthropic efforts: Distributions up to $100,000 may be directed to non-profit organizations tax-free through Dec. 31, 2007.

Another provision extends tax-deferral benefits to IRAs inherited by beneficiaries other than spouses.

And people with modest incomes who contribute to an IRA or an employer-sponsored retirement plan will continue to enjoy additional tax breaks for the effort, thanks to the permanent extension of the incentive known as the Saver’s Credit.

More accessible 401(k) plans
To help boost participation levels, the Pension Protection Act of 2006 allows companies to automatically enroll employees in 401(k) plans. Under the new rules, employers may divert up to 10 percent of a worker’s pay into a tax-deferred company-sponsored account, unless the employee requests in writing to be excluded.

Separately, the Roth option for 401(k) and 403(b) plans, introduced earlier this year, was made permanent. So were accelerated vesting schedules for employer-sponsored plans.

Permanent 529 tax advantages
Long-term college savings strategies received a lift from the act, which resolved uncertainty over a key tax benefit built into 529 savings plans. As long as the money is used for qualifying educational expenses, withdrawals from 529 plans will not be subject to taxes — another feature previously set to expire in 2010.

Pension reforms
The act strengthened requirements for corporations to adequately fund traditional pension plans. It also clarified regulations for creating hybrid plans, which allow for employee savings plans alongside defined benefit plans.

And it forbids employers from forcing employees to invest retirement plan contributions in company stock.

What’s in it for you?
Given the volume and complexity of the Pension Protection Act of 2006, now might be a good time to talk to your tax advisor. It might also be the perfect time to review your long-term investment and estate plans.