BERLIN – If you are nearing retirement or simply reviewing your financial strategy, provisions in the recently enacted Pension Protection Act of 2006 may hold substantial tax-benefits for you and your beneficiaries.
Often referred to as the “PPA,” the Pension Protection Act makes permanent important parts of the Economic Growth & Tax Relief Reconciliation Act of 2001 (EGTRRA). These include increased retirement plan contribution limits, as well as, tax-free qualified distributions from 529 college savings plans.
For many people, saving for retirement is an important financial goal. As recently as 2001, contribution limits for IRAs stood at just $2,000 – a level which had remained unchanged since the mid-1980s. While EGTRRA increased contribution limits for the nine years after its passage, the old limits were set to be reinstated in 2010 unless Congress made them permanent. The PPA makes the EGTRRA increased contribution limits permanent.
For 2006 and 2007, you can contribute up to $4,000 to your IRA. In 2008 that limit increases to $5,000. Beginning in 2009, limits will be reviewed annually to determine if a cost-of-living adjustment is warranted.
The PPA also helps those saving through 401(k)s and other defined contribution plans. Starting this year the annual contribution limit will be reviewed to determine if an increase is warranted. For 2007, you can elect to defer up to $15,500 to a 401(k) plan. Full vesting for employer matching contributions has been accelerated to three or six years. Contribution limits for SEP IRAs and profit-sharing plans have also been increased from 15 percent of eligible employee compensation to 25 percent.
If you are over age 50, there is more good news. The PPA makes EGTRRA’s catch-up contributions of an additional $1,000 for IRAs and $5,000 for 401(k) plans permanent.
If you have put off contributing to a 529 college savings plan because of uncertainty regarding its tax treatment, you may not to have to wait any longer. The PPA makes the tax privileges of 529 plans permanent, meaning that distributions for qualified higher-education expenses are now permanently tax-free at the federal level. In states where the state tax provision mirrors federal tax provisions, qualified distributions are currently tax-free at the state level as well.
The PPA includes a particularly attractive benefit for those who are charitably inclined, but time is running out to take advantage of it. For tax years 2006 and 2007, IRA holders age 70½ or older can choose to send a contribution directly to an eligible charitable organization. But the contribution would otherwise have to be deductible and not exceed $100,000. If these provisions are met, you can exclude the amount of the charitable contribution from taxable income.
Starting this year, a new provision in the PPA allows non-spouse beneficiaries to directly roll over assets inherited from an eligible employer plan to an “inherited IRA” without penalties or taxes. It is important to note that while the PPA allows for these rollovers, individual companies are not required to include them in their plans. Most large companies have already started allowing these rollovers to take effect while smaller companies are slowly getting on board. If this provision of the PPA affects you, it is important to check with your employer to see whether the adjustment has already been made — or will be soon.
It is never easy to understand changes to the tax code. Matters become even more complex when changes are scheduled to take affect years into the future. A financial advisor, backed by a team of tax specialists, can help you decide how to adjust your financial strategy to take advantage of new opportunities.
(The writer is a Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-9084.)