It's not always easy to save enough money for retirement. But some recently enacted legislation might help.
As its name implies, the Pension Protection Act of 2006 was designed to strengthen the private pension system, which currently covers more than 44 million workers and retirees.
Under the new laws, companies that maintain traditional "defined benefit" plans (which pay retirees a specific amount of money based on salary history and years of service) will face tighter plan-funding rules.
But even if you don't participate in a defined benefit plan, you may well benefit from other parts of the Pension Protection Act. Here are a few to consider:
No reductions in retirement plan contribution limits.
In the past few years, the contribution limits have increased for IRAs and for 401(k), 403(b) and 457 plans, and "catch-up" contributions were allowed for anyone 50 or older. These provisions were scheduled to be rolled back after 2010; however, due to the Pension Protection Act, the increases are now permanent. (The traditional and Roth IRA contribution limit for 2006 and 2007 is $4,000. If you are age 50 or older, you can also make a "catch-up" contribution of up to $1,000. The salary deferral contribution limit to a 401(k), 403(b) and 457 plan for 2006 is $15,000. If you are 50 or older, you can make a "catch-up" contribution of up to $5,000. In 2007 and beyond, contribution limits will be indexed for inflation.
Traditional and Roth IRA direct distribution donations to charities.
Effective in 2006-07, if you meet certain conditions, you may move up to $100,000 per year directly from a traditional or Roth IRA to qualifying charities without having the withdrawal counted as income for the year.
Rollovers by non-spouse beneficiaries.
Starting in 2007, if you have been named a beneficiary of a 401(k) or other qualified retirement plan, you will be able to directly roll over your distribution into a new IRA that you've established (an "inherited" IRA).
Previously, this option was reserved for surviving spouses, who could roll over qualified plan assets into their own IRAs. This change could be a big advantage to you. Instead of having to cash out a 401(k) or other retirement plan, and incur a big tax hit, you can now roll over the value of the retirement plan into an IRA and just take the "required minimum distribution" every year, based on your own life expectancy. (To get the full benefits of stretching out withdrawals, see your tax advisor before taking action.)
Tax refunds to IRAs.
Under the new laws, you can now have the IRS deposit your tax refund directly into an IRA as a contribution. In fact, you can split the refunds and deposit them in as many as three different accounts.
Permanent tax benefits for section 529 plans.
If you establish a section 529 plan to help pay for your child's or grandchild's college tuition, withdrawals from the plan will be free from federal income taxes, provided the money is used for education. This tax benefit was scheduled to expire at the end of 2010, but it is now permanent. Please note that contributions are tax-deductible in certain states for residents who participate in their own state's plan.
All in all, the Pension Protection Act of 2006 seems to contain something for everyone.
To see how you can gain the maximum benefits from the new tax laws, consult with your financial professional and tax advisor.
Cheri Lee is an investment representative with Edward Jones. Contact her at (561) 776-8988.