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Submitted by: Bill Brennan and Michael Byman
Bill owns Capital Management Group, LLC. He has more than thirty years experience as an advisor on personal finances, taxes and investments. Bill has been recognized by Washingtonian magazine and other publications as one of the top financial advisors in Washington, D.C. Michael handles business development for Capital Management Group, and is currently pursuing his CFP designation.
This huge piece of legislation, signed into law on August 17, 2006, contains much more than a multitude of arcane new rules about pension plan compliance. It includes a wide range of new provisions for all types of retirement plans that could affect your retirement, investment and tax strategies. Here are some that we think have the broadest impact.
Popular provisions that were due to “sunset” after 2010 are now officially permanent, including:
· The current schedule of increasing contribution limits for 401(k)s, IRAs and other retirement plans – avoiding a return to the lower pre-2001 levels.
· Roth 401(k)s and 403(b)s – allowing after-tax salary contributions to Roth accounts inside a company plan, with tax-free withdrawals during retirement.
· 529 Plans – for tax-advantaged education savings.
Of course, people have already started to take these for granted, but the Act finally eliminates uncertainty and should prompt further use of these excellent savings vehicles.
The Act creates new incentives to encourage adoption and diversification of defined contribution retirement accounts:
· Firms may setup automatic enrollment in their plans, including predetermined salary deferrals. Employees would have to take action if they wish to opt-out or change the deferral percentage.
· Plan administrators can offer personalized investment advice – subject to strict “fiduciary” controls – to help employees choose investments in the employer’s plan.
· Employees can more easily diversify out of employer stock contributed to the plan.
· Businesses must offer faster vesting for employer matching contributions – a maximum of 3-year “cliff” vesting or 2-6 year “graded” vesting.
· Non-spouse beneficiaries can transfer inherited qualified plan assets to an inherited IRA to stretch out distributions and taxation (starting in 2007). Still less flexible than the range of options available to a spouse, but helpful nonetheless.
· Assets can be rolled over from a company plan directly to a Roth IRA (starting 2008) – skipping the previous requirement to park the money in a traditional IRA first.
The Act has some good news and some bad news for charitable giving:
· For tax years 2006 and 2007 only, people age 70 ½ or older can arrange tax-free distributions of up to $100,000 to be paid directly from an IRA to a qualified charitable organization other than a private foundation or donor-advised fund. Qualifying distributions are not included in calculating charitable deduction limitations for the year.
· Receipts or bank records must be maintained for all tax-deductible cash donations – regardless of the amount.
These are just a few of the new rules, and many of them come with conditions too complex to describe in this space. To understand how you can put the new law to work for you, you could read the complete 900-page Pension Protection Act itself – or just give us a call.
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