Pension Protection Act of 2006: Savings Incentives Keep Getting Stronger

The midterm elections brought some surprises, but significant new tax legislation changes went relatively unnoticed by the media. Don’t be fooled. The Pension and Protection Act of 2006 (PPA) brings sweeping reforms to our retirement system. The intent is to protect employee benefits and boost retirement saving.

Here’s what you need to know:

Increased Retirement Account Contributions in 2007 – See the accompanying table.
529 Plan Tax Treatment – Repeal of the sunset provisions set to take place in 2010. Distributions for qualified higher education expenses are permanently tax-free at the federal level.
Roth 401(k) Deferrals – PPA preserves the Roth 401(k) deferrals created under EGTRRA.
IRA Distributions to Charity – PPA allows charitable giving for a limited time for certain IRA owners.
During 2006 and 2007, IRA owners age 70 1⁄2 can send a distribution directly to a charitable organization as long as the distribution does not exceed $100,000.
Tax Refunds May Go to Your IRA – Taxpayers can direct the Treasury to deposit all or part of their federal tax refund directly into an IRA account.
Roth Conversions – After December 2007, eligible rollover distributions from qualified retirement plans will
be permitted to be rolled over directly into a Roth IRA. The distribution is subject to tax, but not the 10% premature distributions penalty. In addition, the Adjusted Gross Income (AGI) limit is repealed on January 1, 2010 for all taxpayers who wish to convert money from their employers’ plan or their traditional IRA. Conversions elected in 2010 can spread the tax liability over two years.
Non-Spousal Beneficiary Rollover – A non-spouse beneficiary will be permitted to directly roll over inherited assets from an eligible retirement plan to an “inherited IRA.” This will give the beneficiary the option to stretch required distributions based upon their life expectancy.
Automatic Enrollments for Retirement Plans – In an effort to increase participation among company-sponsored retirement plans, PPA allows for the automatic enrollment of plan participants. In some states, automatic enrollment is considered garnishment of wages. Because certain states prohibit garnishment of wages, adoptions of automatic enrollment features were essentially precluded. PPA pre-empts state law, eliminating the garnishment hurdle to automatic enrollment.

Whether you live in a red state or a blue one, Washington is expanding the options available to you in your quest for a comfortable retirement.
For more on the Pension Protection Act of 2006, go to www.TheBusinessOwner.com, type in the current password (always found at the bottom of page 2 of your most current issue of The Business Owner) and look in the “The Business Owner Journal January – February 2006 issue.” You’ll find the 900-page original legislation as well as a summary by CCH.

Limitation Type    IRC Section    2007
Defined Benefit Plan    415(b)(1)(A)    $180,000
Maximum Benefit Limit
Defined Contribution Plan    415(c)(1)(A)    $45,000
Maximum Contribution Limit
Elective Deferrals Limit    402(g)(1)    $15,500
401(k) and 403(B) Plans
Elective Deferrals Limit    457(b)(2), and     $15,500
457(B) and 457 (C) Plans    457(c)(1)
Catch-up Contribution Limit    414(v)(2)(B)(i)    $5,000
401(k), 403(B) and 457 Plans
SIMPLE Retirement Accounts    408(p)(2)(B) and     $10,500
Deferral Limit    401(k)(11)(B)
SIMPLE Catch-Up Contribution Limit    414(v)(2)(B)(ii)    $2,500
SEP    408(k)(2)(C)    $500
Employee Covered Compensation
Social Security/Medicare Tax    N/A    12.40%/2.90%
Self Employed Workers