The pension reform act of 2006
The most significant pension reforms in a generation were signed into law in August offering added incentives and flexibility to workers who are saving for their retirement. In addition, the law contains a number of provisions designed to strengthen traditional pension plans by requiring companies to beef up financial contributions to fund their future pension liabilities.
What does the new law mean to you? Employers are now allowed to enroll workers automatically in their company sponsored 401(k) or 403(b) savings plans. Until now, workers had to proactively elect to participate. Also, employers can earmark 3 percent of a workers salary to go into the retirement plan and as much as 6 percent over time. Taxpayers will now have the options of depositing portions of their federal tax refund directly into an IRA. Sponsors of 401(k) and similar plans can now offer face-to-face personally tailored investment advice to help workers better manage their retirement funds. Several retirement savings incentives originally passed by Congress in 2001 and set to disappear in 2010 now become permanent.
Some of the important changes are as follows: Workers in employer-sponsored 401(k) and similar plans may contribute up to $15,000 this year in pre-tax income and higher amounts in subsequent years based upon inflation. Individuals may contribute to an IRA or Roth IRA up to $4,000 in 2006 and 2007 and $5,000 in 2008 with higher amounts thereafter based upon inflation. Anyone age 50 and older can increase these amounts by $1,000. Workers age 50 and older in 401(k) and similar plans can contribute an additional $5,000 on a tax-deferred basis, bringing their maximum total contribution to $20,000. Transferring funds among savings plans will be made easier including the portability of after-tax contributions. For example, in 2008 it becomes easier to roll money from an IRA to a Roth IRA. Also, the new law gives employers enhanced options to offer Roth 401(k) retirement plans.
The reform law also contains several non-retirement changes. The more significant ones are the following: Those 70 and a half and older in 2006 and 2007 can make tax free distributions from their IRA directly to charity. The new rule benefits taxpayers who do not itemize their deductions, as well as those who would be adversely affected by the normal restrictions and limitations on charitable contributions. Section 529 college savings plans are now a permanent part of the law. These plans had been scheduled for elimination in 2010. Beginning in 2010, individuals who have accumulated cash value in an annuity or life insurance contract may use these funds to purchase long term care insurance without paying tax on the withdrawal of funds or on the receipt of long term care benefits.