New Tax Law: Pension Protection Act of 2006

The President signed the huge 907-page " The Pension Protection Act of 2006" into law on August 17, 2006. The law includes a number of significant tax incentives to enhance retirement savings and forces employers to shore up their pension plans.

Here's a brief summary of the some of the Pension Protection Act's tax law changes...

1. Permanent Retirement Savings Incentives. The Economic Growth and Tax Relief Reconciliation Act of 2001 substantially increased pension and individual retirement account contribution limits through 2010 as well as other provisions designed to make retirement saving easier. The law makes these favorable changes permanent. The law also indexes the income limits for traditional, spousal and Roth IRAs to prevent these benefits from being eroded by inflation.

2. Minimum Funding Standards. Significant changes in defined benefit funding rules designed to force employers to shore up their pension plans. Many pensions are under-funded, meaning that promised pension benefits could potentially exceed the funds available, leaving pensions strapped for cash.

The new law allows employers to deduct the cost of making additional contributions to fund the pension and imposes a 10% excise tax on companies that fail to correct their funding deficiencies.

3. Automatic Enrollment. The law creates a safe harbor to encourage employers to offer automatic enrollment in employer-sponsored defined contribution pension plans, which will encourage employee participation.

4. Rollover Rules. The law provides new rollover requirements for after-tax rollovers in annuity contracts, direct rollovers from retirement plans to Roth IRAs, and rollovers by non-spouse beneficiaries of certain retirement plan distributions.

This provision lets workers leave benefits to a domestic partner or dependent, not just a spouse. And workers could draw on retirement funds for medical or financial emergencies involving domestic partners or other beneficiaries. For these non-spouses, the tax payment schedule will be tied to the age of the account's former owner.

5. Saver's Credit Made Permanent. The law makes permanent the Saver's Credit of up to $2,000. Without this extension, the credit would not have been available after 2006. The law also indexes the Saver's Credit income limits to prevent this benefit from being eroded by inflation.

6. In-Service Distributions at age 62. The law allows pension plans to provide for distributions to employees who have attained the age of 62 and who have not separated from employment at the time of the distributions.

7. Stricter Rules on Charitable Donations. The law states that taxpayers must keep records of all cash donations. Individuals must show a receipt from the charity, a canceled check, or credit card statement to prove their donation. No tax deduction will be allowed if the taxpayer cannot provide any supporting documentation. The receipts and other supporting documentation don’t need to be sent with your tax return. Instead taxpayers must keep the records incase of an IRS audit.

This tougher substantiation rule doesn't take effect until 2007, so you don't have to reconstruct all those smaller amounts you gave earlier this year.

8. Direct Donations From IRAs. The law allows taxpayers to make charitable donations directly from their IRA account. The distributions will be tax-free and avoid the penalty on early withdrawals. Taxpayers are allowed to donate up to $100,000 per year from their IRA.

Since the distribution will not be included in taxable income, individuals will not be able to claim a tax deduction for the charitable contribution. However, the ability to keep the money out of your taxable income should help offset the deduction loss.

Judee Slack
CURRICULUM VITAE

Judee Slack is a professional advisor in all areas of small business services, personal & financial strategies and resolution of any type of tax related problem. She has been providing these services in the Orange County, CA area since 1979.

Judee has been assisting small business owners with QuickBooks support since the mid-1990’s and has been a QuickBooks Certified Professional Advisor since 1999. In 2000, she developed this training class designed to help the small business owner understand, maintain and control the financial health of his/her business through QuickBooks.

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