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Joseph N. Rubinstein, MBA
Diversified Securities, Inc.
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Pension Reform

President Bush recently singed into law, The Pension Protection Act of 2006 (PPA of 2006.) The main purpose of this Act is pension related, but as with all Acts, other tax items were included. The PPA of 2006 also has a few items on tax-exempt status and charitable giving. (There is a separate article in this newsletter on charitable giving.)

Pension and Retirement Account Changes

The Act includes pension changes for just about anybody who has a pension or will inherit a retirement account. One temporary tax item, the Savers Credit, which was set to terminate at the end of 2006, has been made permanent. This credit is available for lower income taxpayers, those with adjusted gross income (AGI - bottom line of page one of form 1040) of $50,000 or less on a joint return, who made a contribution to some type of retirement account. This non refundable credit reduces the amount of income tax that a taxpayer has to pay. In effect, the reduction in the tax liability is a refund of some of the money put into the retirement account.

Inherited IRA's

A major change in the Act which goes into effect in 2007 is one that allows individuals who inherit an IRA to put that money directly into another IRA. Current tax law allows this treatment only to the surviving spouse. All others are required to pay tax on 100% of the retirement money in the year it was inherited or over five years. This new rule will be a major tax saver for non spouse beneficiaries who wish to roll the inherited IRA over into another IRA instead of taking cash pay outs.

Defined Benefit Plan Changes

Another major change should benefit those with defined benefit pension plans. For a defined benefit plan, the amount of money a business must currently put into an investment account for its employees is based on how much each employee is expected to get every month when he or she retires. It is the most expensive type of plan that a business can offer.

It is these plans that the major businesses are under funding and turning the obligation over to the US Pension Guarantee Corporation. This portion of the law is very complicated, but it basically means that corporations with defined benefit plans must actually write larger checks to the investment account each year. This reduces the chance that the retirement investment account will be under funded so that your promised retirement funds will be there when you are ready to retire.

401k Plan Changes

Also in the Act, is a change in the eligibility rules for companies with 401k plans. More employees are familiar with this type of plan. A 401K plan, which takes its name from section 401, part K, of the Internal Revenue Code, is a defined contribution plan and requires employees to state how much they want their wages to be reduced and put into an investment account for them. Thus it defines how much is going into the plan now, not how much they will receive in the future.

In the past, if a company offered a 401K plan, its employees had to tell their employers in writing, (called "electing in"), that they wanted to participate in the plan before the employer could begin taking money out of the employee's pay check. This has changed. In the future, employees will automatically be enrolled in the 401K plan unless they tell their employer in writing, (called "electing out"), that they do not want to participate in the plan. This may not seem like much of a change, but it does make a difference for those plans that are subject to what is called "top heavy rules."

The printed version of the Act is around 900 pages, so watch for future articles on other provisions of the Act.

Pension Protection Act 101

The new Pension Protection Act of 2006 includes important benefits for retirement savers. Click here for some of the key provisions (American Funds)