Here is some information I believe we help us understand the Pension Protection Act of 2006:
Monday, September 18, 2006
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SPECIAL SUMMARY OF THE PENSION PROTECTION ACT OF 2006SPECIAL SUMMARY OF THE PENSION PROTECTION ACT OF 2006The Pension Protection Act of 2006, signed by President Bush on August 17, 2006, made some significant overhauls to laws that govern pension plans. The bulk of the Act concerns defined benefit pension plans.
But the Act has a number of tax and retirement planning provisions that are of particular interest to Baby Boomers and Seniors. The law has made a number of retirement savings provisions permanent that had been set to expire, made payout and rollovers of retirement monies more liberal, and toughened some laws pertaining to charitable contributions.
Of course, for detailed explanations and how the new law applies to you and your clients, it's best to consult a qualified tax specialist.
Here are highlights, by no means exhaustive, of some key provisions of the Act.
Retirement Savings
- IRA and Roth IRA contribution limits gradually increase from $2,000 to $5,000 by 2008. After 2008, limits will be adjusted for cost-of-living increases.
- Catch-up contributions for those aged 50 or older will be $1,000 for IRAs, $2,500 for SIMPLE-IRAs, and $5,000 for 401k plans. IRA catch-up contribution limits won't be adjusted for inflation, but SIMPLE and 401k catch-up contributions will be adjusted in $500 increments based on inflation.
- Roth 401k and Roth 403b plans were made permanent. Previous tax laws were such that Roth plans wouldn't be allowed after 2010.
- Non-spouse beneficiaries can now roll over assets inherited from a qualified retirement plan into an IRA. Such beneficiaries avoid paying taxes on the rollover, and will be taxed only when the assets are withdrawn. Before, only those who inherited retirement assets from a deceased spouse got such beneficial tax treatment.
- Rollovers to a Roth IRA have been simplified. Taxpayers will be allowed to make direct rollovers from a qualified retirement plan, tax-sheltered annuity or a government plan directly into a Roth IRA as long as the person's meets conversion qualification, such as having an income below $100,000.
- At tax time, taxpayers can direct the IRS to deposit all or a portion of tax refunds directly into an IRA. The provision, effective January 1, 2007, will apply to the 2006 tax year refunds.
- Military personnel called to active duty can take a penalty-free withdrawal from their 401k or IRA plans if they're called to active duty between September 11, 2001 and December 31, 2007. They'll be able to redeposit the withdrawals--without paying income tax on those withdrawals--up to two years after their active duty ends.
- The Savers Credit was made permanent, which rewards lower-income workers who put money into a retirement account. The plan was set to expire at the end of 2007. Such workers can keep claiming the credit, which could reduce their tax bill. Next year, income levels used to decide eligibility and credit amounts will be indexed for inflation.
- Employers can now automatically enroll employees into a 401(k) plan and employees will have to opt out if they don't want to participate.
Charitable Contributions
- Those 70 1/2 or older can send money--up to $100,000 annually--from their IRAs directly to a charitable group through Dec. 31, 2007. Those with traditional IRAs benefit because typically such monies are eventually taxable. Donating these dollars keeps them out of the taxable income category.
- Those who don't itemize their tax returns can't deduct charitable contributions.
- To deduct charitable gifts, taxpayers must prove the donation with receipts, canceled checks or a letter from the charity confirming the gift.
- Donations, such as clothes and other items, must be in good condition to receive a deduction, though there's no clear definition of "good" in the law.
College Savings
- The federal tax exemption for Section 529 plans was set to expire at the end of 2010. But the college savings plans, which allow taxpayers to withdraw 529 Plan funds tax-free to pay college costs, were left in place.
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