On August 17, 2006, President Bush signed into law The Pension Protection Act of 2006—the most sweeping reform of American pension laws in over 30 years. The Act includes major reforms that are geared toward strengthening our pension system. The legislation includes over 900 pages of amendments that help expand investors' opportunities to build their retirement nest eggs.
PPA: What Does it Mean?
The Pension Protection Act is a clear message to businesses across America that they must keep their promises to their workers. It contains provisions to help American workers save for retirement through Individual Retirement Accounts (IRAs) and defined contribution plans, such as 401(k)s. In short, it allows more—more ways to invest for a more financially secure retirement.
Here are some highlights of the legislation:
- Increases flexibility of saving in Individual Retirement Accounts (IRAs).
- Allows for inflation indexing of the income limits used to determine eligibility for Roth IRA contributions and deductions for contributions to traditional IRAs–providing opportunities for more Americans to save more and be better prepared for retirement.
- Permits taxpayers to split tax refunds and make direct deposits into IRAs–making it easier to invest in your future.
- Continues incentives for lower–income workers–making permanent the Saver's Credit, which provides low–income taxpayers with a matching tax credit.
More Flexibility for Rollovers
- Permits direct rollovers from retirement plans to Roth IRAs–simplifying the rollover process for those that are eligible ($100,000 income limit).
- Allows tax–free rollovers from qualified retirement plans to an IRA for non spouse beneficiaries of deceased participants via a trustee–to–trustee transfer–previously available for only the spouse, this offers more tax–efficient distributions of inherited IRA balances.
- Permits after–tax contributions to a qualified retirement plan to be rolled over into an IRA–this provision is now made permanent, helping to increase the attractiveness of rollover IRAs.
Preservation of Tax–Efficient Higher Education Savings Vehicles
- Allows tax–free withdrawals from Section 529 accounts when used for qualified higher education expenses—now made permanent, providing the ability for college savings to grow tax–deferred and be withdrawn tax–free, with no limitations on income.
- Permits rollovers of 529 assets to another 529 program without changing beneficiaries (once per year)—now permanently preserves limited rollover flexibility for 529 plans.
- Makes permanent the increase in the annual contribution limit for Coverdell Education Saving Accounts (CESAs) from $500 to $2,000 and indexes both the contribution and income limitations to inflation—enabling parents to continue saving for higher education at more realistic levels.
- Permits contributions to a 529 account and a CESA for the same beneficiary in the same year—allowing investors to continue to make the most of both vehicles. (CESAs offer more flexibility in investments, but 529 plans often provide state tax incentives.)
More Incentives for Defined Contribution Plans
- Gives guidelines for sponsors to "auto enroll" their employees—providing a much needed boost to plan participation by supplying sponsors with "safe harbor" rules.
- Allows participants to receive investment advice from certain advisors affiliated with the plan, provided that the advice is not biased toward the advisor's own investment products, making it easier for participants to get the help they need.
- Makes provisions from earlier legislation (i.e., EGTRRA) permanent–allowing "temporary" provisions, such as higher deferral limits, catch–up contributions, Roth 401(k) contributions, and a Saver's Credit, to become permanent.
- Accelerates vesting schedules–providing workers the opportunity to "take it with them" should they change jobs.
To find out how The Pension Protection Act of 2006 impacts your retirement savings, speak with your financial advisor today. Be sure to ask about how you can take advantage of the many provisions that are aimed at helping you build a more secure retirement nest egg.
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|Pension Protection Act of 2006: Ensuring Greater Retirement Security for American Workers|