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Disclosure
 
The Pension Protection Act of 2006
 

 
The Pension Protection Act of 2006, signed into law by President Bush on August 17, 2006, is primarily intended to protect the funding of employer pension plans. But the Act also contains provisions that could affect your savings and taxes. At Grand Wealth Management, we are reviewing how the Pension Protection Act impacts our clients, and where appropriate, helping individual clients make the most of the new law. For now, let’s look at some of the new law’s key changes that you may want to incorporate into your personal financial planning.
 
Individual Retirement Accounts (IRAs)   
 
Extension of increased contribution limits. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) increased annual limits on traditional and Roth IRA contributions. EGTRRA also enabled individuals age 50 or older to make “catch-up contributions” beyond the regular annual limits on traditional and Roth IRA contributions. The EGTRRA rules were set to expire after 2010, but the Pension Protection Act made them permanent. See below:    

 

Year Annual limit Catch-up contribution
2006 $4,000 $1,000
2007 $4,000 $1,000
2008 $5,000 $1,000

2009 and after

Adjusted for inflation $1,000
 
Direct deposit of tax refunds. Starting in 2007, you’ll be able to direct-deposit all or part of your tax refund into an IRA, using a form that the Internal Revenue Service (IRS) will make available.
 
Direct rollovers to a Roth IRA. Starting in 2008, if you receive a distribution of tax-deferred assets from a 401(k) or other qualified plan, you’ll be able to roll these assets directly to a Roth IRA, provided your modified adjusted gross income (MAGI) is $100,000 or less and your filing status is not married, filing separately. (The $100,000-or-less MAGI restriction goes away in 2010.) Upon the rollover, you will owe income taxes, but no early-withdrawal penalty, on the previously tax-deferred assets. When you later take withdrawals from the Roth IRA, you won’t pay any taxes or penalties if you meet certain requirements.
 
Currently, the only type of IRA that can accept a direct rollover from a qualified plan is a traditional (non-Roth) IRA. If you do this type of rollover, you can later convert your traditional IRA to a Roth IRA if you meet certain qualifications.    
 
Charitable donations from an IRA. In 2006 and 2007, if you are age 70 ½ or older, you can donate up to $100,000 a year to tax-exempt charities directly from your traditional or Roth IRA without triggering taxes or early-withdrawal penalties. You can’t claim a tax deduction for such a donation, because the distribution is not included in your taxable income. Donations to donor-advised funds, supporting organizations and private foundations are excluded from this provision.
 
Rollovers for non-spouse beneficiaries. Under current rules, when a deceased person’s tax-deferred assets from a qualified plan are distributed to the surviving spouse, the spouse can generally roll these assets to his or her own IRA, thus keeping the tax deferral going. Starting in 2007, this rollover privilege will also apply to a non-spouse beneficiary. The non-spouse beneficiary will have to start taking minimum distributions from the inherited IRA within a given period of time.
 
401(k) and Similar Employee Savings Plans
 
Extension of increased salary-deferral contribution limits. EGTRRA increased annual limits on salary-deferral contributions to 401(k), 403(b) and similar employee savings plans. EGTRRA also enabled individuals age 50 or older to make “catch-up contributions” beyond the regular annual limits on salary-deferral contributions to these plans. The EGTRRA rules were set to expire after 2010, but the Pension Protection Act made them permanent. See below:

Year Annual limit Catch-up contribution
2006 $15,000 $5,000
2007 and after Adjusted for inflation Adjusted for inflation

Roth feature made permanent. The Pension Protection Act permanently allows employees to make Roth contributions to 401(k) and 403(b) savings plans. Roth contributions are post-tax, but earnings on them grow tax-deferred and, under certain guidelines, can be withdrawn tax-free in retirement. This Roth feature was added to employee savings plans by EGTRRA but was due to expire after 2010.
 
Tax Deductions for Charitable Donations
 
Proof required. Starting in 2007, you’ll need to keep receipts, canceled checks, bank records, or credit card statements showing cash donations to charitable organizations in order to deduct these donations on your tax return. You won’t need to mail in any documentation with your return, but you might be required to show proof to the IRS if you’re ever audited.
 
Condition of donated non-cash items. Also starting in 2007, if you wish to deduct charitable donations of non-cash items (cars, clothing, household goods, etc.), the items will have to be in good condition or better. The IRS has not defined “good condition.”   
 
Section 529 College Savings Plans
 
Tax-free withdrawals made permanent. The Pension Protection Act makes permanent the rule that, under certain guidelines, lets you make federal-income-tax-free withdrawals from a section 529 college savings plan in order to pay higher-education expenses. Before the Act came along, this tax break was set to expire after 2010.
    


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