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2006 Pension Protection Act - General Alert: Pensions and Other Tax Law Changes! After years of debate, compromise and often intensely partisan negotiations, Congress has passed a comprehensive pension reform bill. Keep in mind that the new law contains much more than just pension reform. It not only makes permanent some important retirement savings incentives that benefit many of us, it also creates some new ones. In another area, the new law makes some important changes to how you deduct your contributions to charitable organizations. This email blast highlights some of the key developments in the new Pension Protection Act of 2006 and what steps you could take to maximize your retirement and tax savings. Traditional public company pension plans in trouble. Traditional pension plans of public companies, which pay a defined benefit over a period of time, are in trouble. Many are underfunded. Others have been turned over to the Pension Benefit Guaranty Corporation (PBGC), the pension payor of last resort. Why have so many failed? The evolution of our economy from an industrial/manufacturing base to a service-orientated one has contributed. Global competition is also a factor. More and more companies have either terminated their traditional pension plans or converted them to 401(k)s or other types of savings arrangements. Currently, about 30,000 traditional pension plans are underfunded. Some are teetering on collapse. This crisis spurred Congress to enact a comprehensive pension reform bill. The new law aims to prevent any more troubled plans from folding and dumping their obligations on the PBGC, which already has a deficit of nearly $30 billion. Most underfunded plans will have to become fully funded over seven years. But before we go into more detail about pension plan funding, let's take a look at the many retirement savings incentives in the new law. Permanent retirement savings incentives. If you've been making higher contributions to IRAs, 401(k)s and similar arrangements, catch-up contributions, and enjoyed greater portability, you've benefited from enhanced retirement savings incentives enacted in 2001. Five years ago, Congress passed the Economic Growth and Tax Relief Reconciliation of 2001 (EGTRRA) . This law created many new incentives to encourage people to save more for retirement. However, because of its huge price tag, Congress made EGTRRA temporary. All of its tax breaks, including the retirement savings incentives, had been set to expire in 2011. The new pension reform bill makes them permanent. Instead of expiring on December 31, 2010 as scheduled, they are now extended permanently. Here are some of the highlights: Higher IRA contribution dollar amounts. EGTRRA gradually raised the amount you can contribute annually to an IRA. For 2006, it is $4,000. That amount rises to $5,000. The new law makes the $5,000 amount permanent and adjusts it for inflation after 2008. Higher dollar limits on defined contribution plans. If you have 401(k), 457 or similar plan, the new law makes permanent thehigher dollar limits on defined contribution plans ($44,000 in 2006) as well as elective deferrals for 401(k)s, 457s and SIMPLE plans. The new law also makes permanent the generous treatment of compensation that may be taken into account under a plan. Catch-up contributions. If you are age 50 or older, you should be making catch-up contributions. EGTRRA allowed individuals age 50 and older to make additional contributions to IRAs, 401(k)s and other arrangements. For 2006, you can make an additional catch-up contribution of $1,000 to an IRA if you are age 50 or older. You can make an additional catch-up contribution of $5,000 to a 401(k) plan if you are age 50 or older. Because EGTRRA is temporary, you would not have been able to make catch-up contributions after 2010. The new pension reform law makes catch-up contributions permanent. It also indexes the $5,000 401(k) catch-amount amount for inflation but not the $1,000 IRA catch-up amount. Roth 401(k)s. You've probably heard a lot about Roth 401(k)s over the past few months. While they were created as part of EGTRRA in 2001, employers could only start offering them this year. Roth 401(k)s are similar to Roth IRAs. Depending on your income and where you are at in your work life, if you're just starting out or nearing retirement, Roth 401(k)s can be a valuable addition to your retirement portfolio. Until this new law, many employers were reluctant to offer Roth 401(k)s because they would have expired after 2010. The new law makes them permanent and this could encourage more employers to offer them. Of course, “permanent” means that plan distributions may be tax-free until Congress changes its mind, as it did with Social Security benefits. New and enhanced incentives. Besides making the retirement savings breakspermanent, the pension reform law also creates some new incentives. You can ask the IRS to deposit your tax refund into an IRA (effective for 2007). The new law also allows direct rollovers from a qualified retirement plan, tax-sheltered annuity or government plan directly to a Roth IRA and will treat it as a Roth conversion if all other qualifications are met (effective for 2008). In another important development, non-spousal beneficiaries can roll over their interests in a qualified retirement plan, government plan or tax-sheltered annuity into an IRA (effective for 2007). Previously, this treatment was only available to spouses. The new law also allows IRA and 401(k) providers to offer personalized investment advice (starting in 2007). More incentives. In addition to these valuable savings incentives, the new pension reform law also makes permanent greater portability for 403(b) and 457 plans; faster vesting of employer matching contributions; and the Saver's Credit (which benefits moderate income families). For small businesses thinking of starting a pension plan, the new law makes permanent the $500 maximum tax credit for start-up costs. New rules for charitable donations. Americans donate billions of dollars to charitable organizations every year. Many contributions are in cash; others in tangible goods, such as household items and clothing. Because of the huge amounts of money involved, charitable donations have always been ripe for abuse. Congress has known this a long time and the new pension reform law cracks down on abusers. Effective as of the date of enactment of the new law, no deduction will be allowed for any contribution of cash, check or other monetary gift unless you can show a bank record or a written communication from the charity. This means you'll need to either get a receipt for every cash donation you make or make your donation by check, credit or debit card, so your bank statement will show it. Congress made this change to crack down on taxpayers who inflate their cash contributions. The new pension reform law also cracks down on donations of broken or malfunctioning household items and poor or soiled clothing. Household items and clothing must be in "good condition" to be deductible. Otherwise, they're not. There is a limited antiques exception for donated single items appraised at more than $500. The IRS is expected to issue guidance about what is good condition in time for the 2007 tax filing season as this change is also effective as of the date of enactment of the new law. While the new law imposes restrictions on contributions of cash, household goods and clothing, it expands some other deductions. Last year, in response to Hurricane Katrina, Congress enhanced the deduction for donations of food and books. The new law extends this special treatment through December 31, 2007. If you are age 70 or older, you will be able to make a tax-free distribution of IRA proceeds up to $100,000 to a charitable organization through December 31, 2007. The new law also increases the deduction limits for qualified conservation easements for 2006 and 2007. Avoiding a bailout. Before closing, let's take another look at the pension reform parts of the new law. As we said earlier, approximately 30,000 plans are underfunded to the tune of $450 billion. Congress wants these plans to survive, so it is giving plans seven years (longer for the airline industry) to become fully funded. At-risk plans, which are critically underfunded, get some additional help but they also have more responsibilities to their participants. The new law also changes the rules for valuing pension liabilities. Most of the pension reform provisions take effect after 2007 with some exceptions. Start planning. The new pension reform law is 900+ pages long. It impacts everyone and not only individuals with traditional pension plans. The retirement savings incentives in the new law are invaluable and can significantly maximize not only your retirement portfolio but also give you generous tax breaks. The new charitable contribution rules are a mixed bag. Some are generous; others less so. While many of the new incentives are permanent, others are only temporary. Some take effective this year, and others not until 2007 or later. In conjunction with year end planning, we will review your situation and make sure you get the most out of this valuable new law. |
