The Pension Protection Act (PPA), signed into law by the president in August, will extend a number of retirement savings and 529 plan opportunities from the Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA) that were scheduled to expire at the end of 2010 and create new opportunities for savers. Some of the PPA’s benefits include:
- Direct rollovers from retirement plans to Roth IRAs. Starting in 2008, you will be able to make direct rollovers of distributions from your 401(k) and other retirement plans directly into a Roth IRA, subject to eligibility requirements. Currently, you have to move it to a traditional IRA first.
- Permanent increased contribution limits in IRAs and 401(k)s. Higher contribution limits, currently $4,000 for IRAs and $15,000 for 401(k)s will remain in place and will be indexed for inflation in future years.
- Permanent catch-up contribution limits for those age 50 or older. Catch-up contributions which are currently $1,000 for IRAs and $5,000 for 401(k)s will remain and will be indexed for inflation in future years.
- Automatic enrollment into 401(k) plans. In an effort to encourage more individuals to save for retirement, the PPA has made it easier for employers to offer automatic enrollment into 401(k) plans. Employees not wishing to contribute may opt out.
- Permanent tax-exempt status for 529 college savings plans. The tax-advantaged status of 529 plans has been made permanent, allaying concerns of those benefits expiring, and offering the opportunity to contribute to maximize favorable contribution limits.
These are the features that most people will see a benefit from but the PPA also covers a lot of pension issues as well. The Pension Protection Act “requires most pension plans to become fully funded over a seven-year period” starting in 2008, according to a CCH Tax Briefing. To achieve full pension funding, the new law allows employers to deduct the cost of making additional contributions to fund the pension, provides strict funding guidelines, and imposes a 10% excise tax on companies that fail to correct their funding deficiencies.
For those people lucky enough to have a job that includes a pension, this is a good step towards helping to ensure these programs are properly funded
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.