The Pension Protection Act of 2006:
Texas CPAs Point Out Key Provisions That Can Affect Your Retirement Savings

DALLAS — On Aug. 17, 2006, President Bush signed the Pension Protection Act of 2006, the country’s most sweeping reform of pension laws in 30 years. Many of the Act’s provisions are aimed at strengthening defined benefit retirement plans by imposing stricter funding and disclosure rules and increasing the level of premiums companies pay to the Pension Benefit Guaranty Corporation, which insures pension plans.

According to the Texas Society of CPAs, the Act also makes permanent many of the retirement provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 that were set to expire after 2010 and includes several new provisions. The following highlights how the Act expands opportunities for workers to save for retirement.

Increased contribution limits made permanent
The 2006 Pension Protection Act permanently extends the increased contribution limits for IRAs, 401(k)s, and other qualified retirement plans, as well as catch-up contributions available for taxpayers age 50 and older, and certain inflation indexing that will start in 2007.

Automatic enrollment
To encourage employee participation in 401(k) plans, the new legislation permits companies to automatically enroll eligible employees into the company’s 401(k) plan. Employees need to opt-out if they choose not to participate.

Investment Advice
The new law permits providers of 401(k)s, IRAs, and similar plans to offer personalized investment advice to account holders. The intention is that this will provide employees with information for making better retirement decisions.

Direct deposit of tax refunds into an IRA account
Under the new Act, taxpayers can direct the IRS to deposit all or part of their tax refund into an IRA account held by the taxpayer, or the taxpayer’s spouse on a joint return.

Saver's credit made permanent
The new Act makes permanent the Saver’s Tax Credit, which was due to expire at the end of 2006. The credit allows eligible low-income taxpayers who satisfy certain income limits to receive tax credits as an incentive to save for retirement. The income limits are indexed for inflation.

Non-spouse beneficiaries
Starting in 2007, a non-spouse beneficiary of an employer qualified retirement plan can direct a plan trustee to transfer your account directly into an IRA. (In the past, this rule applied only to a surviving spouse.) As a result, at your death, a non-spouse beneficiary is not obligated to take a lump sum distribution that the plan might require and incur immediate tax. Now, the non-spouse beneficiary can receive payments over his or her lifetime.

ROLLOVERS FROM Qualified Plans to a Roth IRA.
Starting in 2008, the new law allows direct rollovers from a qualified company retirement plan, tax-sheltered annuity, or governmental plan directory to a Roth IRA and treats the rollover as a Roth conversion. Prior to 2008, funds from an employer retirement plan must be rolled into a traditional IRA before being converted to a Roth IRA. Direct rollover is prohibited if your adjusted gross income is greater than $100,000. (There is no AGI limit starting in 2010.)

Penalty-free early distributions for military reservists and public service employees.
For military reservists who are called to active military duty after Sept. 11, 2001, and before Dec. 31, 2007, the Pension Protection Act waives early withdrawal penalties on distributions from IRAs, 401(k)s, and other retirement plans. Reservists have up to two years after the end of their active duty to re-contribute the amount withdrawn without adhering to the regular limits on IRA contributions. A re-contribution is not deductible. A refund claim may be made on an amended tax return.

The new law also eliminates the 10 percent early-withdrawal tax on distributions from a government defined benefit pension plan to qualified public safety employees, including police, fire, and EMT employees who separate from service after age 50.

A CPA CAN HELP
The Pension Protection Act includes a number of provisions that may impact the way you save for retirement. Work with a CPA to develop strategies for making the most of your retirement savings plan.

PERSONAL FINANCE INFORMATION
For additional personal finance tips, visit www.ValueYourMoney.org. While there, sign up to receive a free monthly electronic newsletter with personal finance tips on variety of topics.

ABOUT TSCPA
TSCPA (http://www.tscpa.org) is a nonprofit, voluntary, professional organization representing Texas CPAs. The society has 20 local chapters statewide and has 27,000 members, one of the largest in-state memberships of any state CPA society in the United States. TSCPA is committed to serving the public interest with programs that advance the highest standards of ethics and practice within the CPA profession.