Pension Protection Act Of 2006

Tax changes made by new pension law

On August 17, 2006, President Bush signed the Pension Protection Act of 2006. The Act mainly deals with the funding of traditional pension plans, requiring most plans to become fully funded over a seven-year period. This 900-plus page pension law also includes a number of important tax provisions. Here are the highlights of those tax changes.

· Higher plan limits. A 2001 tax law set higher contribution limits for IRAs, SIMPLEs, SEPs, 401(k)s, and 457 plans. But these larger contribution amounts were set to expire after 2010 along with most of the other provisions in the 2001 law. The Pension Act makes these higher contribution limits permanent and generally indexes the limits for inflation in the future.

· Saver’s credit. The saver’s tax credit that provides for a credit of up to $1,000 annually for lower-income individuals’ contributions to retirement plans is made permanent. The income-based phase-out ranges for the credit will be indexed for inflation, a change that will make the credit available to more taxpayers.

· Plan start-up credit. The tax credit for small businesses that start a new retirement plan (up to $500 per year for three years) is made permanent.

· Roth 401(k)s. Roth 401(k)s, which had been scheduled to end after 2010, are made permanent. This change may increase their popularity among both employers and employees.

· Nonspouse rollovers. Starting in 2007, the Pension Reform Act permits tax-free rollovers of a deceased person’s IRA or retirement plan into a nonspousal beneficiary’s IRA. Before this change, only spouses enjoyed this tax-free option.

· Tax refunds. Beginning next year, taxpayers will be allowed to have all or part of their income tax refund directly deposited into their IRA.

· Penalty easing. Generally a 10% penalty applies to early withdrawals from retirement accounts. The new law provides an exception to the penalty for military reservists called to active duty and for certain public safety employees (e.g., police, firemen, and medical emergency personnel).

· Section 529 plans. Distributions from Section 529 plans used to pay for college expenses were scheduled to lose their tax-free status after 2010. The Pension Act makes the tax-favored treatment for 529 plans permanent.

· Charitable donations. The rules are tightened for donations of cash, clothing, household items, and easements. No tax deduction will be allowed for contributions made by cash or check, regardless of the amount, without a receipt from the charity or a bank record. No deduction will be allowed for used clothing or household goods unless the items are in “good” condition.

· IRA donations. Older taxpayers will temporarily be permitted to make direct donations to charities from their IRA without first paying tax on the distribution. A $100,000 annual limit applies.

This new law has many more provisions, some of which could affect you or your business. It will be important to consider these recent changes as you do your year-end planning. For details on how the law might affect you, be sure to give us a call.

The information contained on this site should in no way be considered to be professional advice in the form of either tax, accounting, or legal service or consultation. You should always consult with a professional familiar with your individual circumstances before making any specific decisions related to accounting, tax, or legal matters.