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President Bush recently singed into law, The Pension Protection Act of
2006 (PPA of 2006.) The main purpose of this Act is pension related,
but as with all Acts, other tax items were included. The PPA of 2006
also has a few items on tax-exempt status and charitable giving.
Pension and Retirement Account Changes
The Act includes pension charges for just about anybody who has a
pension or will inherit a retirement account. One temporary tax item,
the Savers Credit, which was set to terminate at the end of 2006, has
been made permanent. This credit is available for lower income
taxpayers, those with adjusted gross income (AGI - bottom line of page
one of form 1040) of $50,000 or less on a joint return, who made a
contribution to some type of retirement account. This non refundable
credit reduces the amount of income tax that a taxpayer has to pay. In
effect, the reduction in the tax liability is a refund of some of the
money put into the retirement account.
Inherited IRA's
A major change in the Act which goes into effect in 2007 is one that
allows individuals who inherit an IRA to put that money directly into
another IRA. Current tax law allows this treatment only to the
surviving spouse. All others are required to pay tax on 100% of the
retirement money in the year it was inherited or over five years. This
new rule will be a major tax saver for non spouse beneficiaries who
wish to roll the inherited IRA over into another IRA instead of taking
cash pay outs.
Defined Benefit Plan Changes
Another major change should benefit those with defined benefit
pension plans. For a defined benefit plan, the amount of money a
business must currently put into an investment account for its
employees is based on how much each employee is expected to get every
month when he or she retires. It is the most expensive type of plan
that a business can offer.
It is these plans that the major businesses are under funding and
turning the obligation over to the US Pension Guarantee Corporation.
This portion of the law is very complicated, but it basically means
that corporations with defined benefit plans must actually write larger
checks to the investment account each year. This reduces the chance
that the retirement investment account will be under funded so that
your promised retirement funds will be there when you are ready to
retire.
401k Plan Changes
Also in the Act, is a change in the eligibility rules for companies
with 401k plans. More employees are familiar with this type of plan. A
401K plan, which takes its name from section 401, part K, of the
Internal Revenue Code, is a defined contribution plan and requires
employees to state how much they want their wages to be reduced and put
into an investment account for them. Thus it defines how much is going
into the plan now, not how much they will receive in the future.
In the past, if a company offered a 401K plan, its employees had to
tell their employers in writing, (called "electing in"), that they
wanted to participate in the plan before the employer could begin
taking money out of the employee's pay check. This has changed. In the
future, employees will automatically be enrolled in the 401K plan
unless they tell their employer in writing, (called "electing out"),
that they do not want to participate in the plan. This may not seem
like much of a change, but it does make a difference for those plans
that are subject to what is called "top heavy rules."
The printed version of the Act is around 900 pages, so watch for future articles on other provisions of the Act.
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