MoneyWatch

Athena financial & insurance services, inc.

Registered Investment Advisors
Text Box: The Pension Protection Act of 2006 makes permanent a number of tax rules passed in 2001, but were set to expire in 2010. It also includes changes for IRAs, 401(k)s, 403(b)s, and pension plans that will make it easier for you to save for retirement and college. Contribution limits to IRAs, 401(k)s and other workplace savings plans were first increased in 2001 but increases were set to expire in 2010. The Pension Protection Act of 2006 makes these increases permanent. Annual IRA contribution limits are scheduled to further increase 2008. What's more, most of these limits may go up as cost of living increases. Taking advantage of these permanent increases should make it easier for you to reach your retirement goals in less time. The new law also includes an important new provision for non-spouse beneficiaries of a retirement plan. The law allows non-spouse beneficiaries to roll over assets inherited from a qualified retirement plan into an IRA. The beneficiary will avoid tax on the rollover, and will be taxed only when the assets are withdrawn. Previously, this tax treatment was available only for people who inherited retirement assets from a deceased spouse. The new law will mean more flexible retirement and estate planning for non-spouse beneficiaries, such as domestic partners. The Pension Protection Act also includes a provision which allows taxpayers to donate money to charity directly from their IRA account. The distributions will be tax-free and avoid the penalty on early withdrawals. Taxpayers are allowed to donate up to $100,000 per year from their IRA. Since the distribution will not be included in taxable income, individuals will not be able to claim a tax deduction for the charitable contribution. The new law permanently allows for Roth 401k and Roth 403b plans. Under previous tax law, Roth-type 401k and 403b plans were not allowed after 2010. The new law removes this sunset provision. Individuals can make post-tax contributions to a Roth 401k or Roth 403b plan, up to the plan limits. The assets grow tax-deferred and may be withdrawn tax-free in retirement. It will now be easier for employers are to automatically enroll their employees into a 401k retirement plans with default contribution levels. Employees will need to opt-out of the 401k if they don't wish to participate. Military personnel who are called to active duty can now take a penalty-free withdrawal from their 401k or IRA if they are called to active duty between September 11, 2001, and December 31, 2007. The IRS will allow these individuals to re-deposit the withdrawal up to two years after the end of their active duty and thereby avoid paying income tax on the withdrawal. The new law also makes it much easier to make hardship withdrawals from 401k plans. The new law also allows hardship withdrawals "with respect to any person listed as a beneficiary under the 401(k) plan The bulk of the Pension Protection Act is designed to force large employers with so called “defined benefit” plans to shore up their pension plans. Many pensions are under funded, which means that promised pension benefits could potentially exceed the funds available. The Pension Protection Act of 2006 "requires most pension plans to become fully funded over a seven-year period" starting in 2008, according to a Commerce Clearing House Tax Briefing. To achieve full pension funding, the new law allows employers to deduct the cost of making additional contributions to fund the pension, provides strict funding guidelines, and imposes a 10% excise tax on companies that fail to correct their funding deficiencies. The new law also makes permanent to so called “savers credit”. This is a tax code provision which allows low and middle income wage earners an additional tax deduction for pension plan contributions.▲

Pension Protection Act of 2006...

Volume 17, Issue 18

September 18, 2006

IRA and 401(k) Plan Changes