By Howard Slater, CFP, CLU, ChFC, MBA
In 2006, Congress and President Bush initiated an aggressive attempt to prevent further deterioration of pensions and consumer confidence with the enactment of the Pension Protection Act (PPA) of 2006. With an estimated 40 million-plus workers covered by pension plans and 30,000 plans under funded, the stakes are high. Deduction limits, fully funding plans, “at-risk-plan” funding requirements, benefit limitations and valuing pension liabilities are all addressed at length in the PPA.
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The most direct impact is the elimination of the sunset provision for EGTRRA. |
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No more sunset
The most direct impact to you and your clients is the elimination of the sunset provision for the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which had numerous provisions that were set to expire in 2010. Under EGTRRA, for example, in 2010, the elective deferrals to 403(b) or 401(k) plans would have been $15,000, plus any incremental cost-of-living adjustments that accrued after the $15,000 level was attained in 2006. The sunset provision would have reduced the limit to its 2001 level of only $10,500, plus whatever incremental cost-of-living adjustments would have accumulated under that limit if the EGTRRA provision had never gone into effect. IRA contributions were $4,000 in 2007, $5,000 in 2008, and adjusted for inflation after 2008. Catch-up contributions for people age 50 or older will be $1,000 for IRAs and $5,000 for 403(b) and 401(k) plans. 403(b) and 401(k) catch-up contributions will be adjusted in $500 increments based on inflation.
The PPA provides for cost-of-living adjustments for the AGI limits for deductible traditional IRAs and Roth IRAs (in $1,000 increments) starting in 2007. Bottom line, the PPA helps preserve increased savings limits, which afford you better opportunities to help your clients save money. If you are active in the charitable segment of the marketplace, the new law also allowed IRA owners age 70½ and over to make tax-free distributions of up to $100,000 directly to tax-exempt charities in 2006 and 2007.
More incentives to save
As another incentive to save, PPA permanently extends the Roth 401(k) and 403(b) features that were introduced in 2006 and were scheduled to sunset in 2010. Employees will now be permanently able to make Roth-style after-tax contributions to an employer-sponsored retirement plan. Contributions and any potential earnings are eligible for tax-free withdrawal, if the account is open for five years and the participant is at least 59½ years of age. Many employers were not keen on amending their plans to offer Roth savings provisions because of the cost of amending their plans to provide for a type of contribution that would only be permitted for five years. However, by removing this sunset, the legislation might encourage employers to adopt the Roth provisions.
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PPA makes EGTRRA’s 529 provisions permanent. |
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The PPA also expands some existing rollover provisions and introduces some new ones. As a result, clients will be able to convert retirement-plan balances directly into a Roth IRA without first rolling over the funds into a traditional IRA, starting this year. Other new legislation, separate from the 2006 act, states that there will no longer be an income limitation for those interested in converting funds to a Roth IRA, starting in 2010. Nonspouse beneficiaries were able to roll over inherited 403(b), qualified, or public 457(b) accounts into their own IRAs, as of last year.
The new IRA will be subject to the same rules as an IRA inherited by a nonspouse beneficiary. To the extent provided by Treasury regulations, this will also apply to benefits payable to a trust maintained for a designated beneficiary. Bottom line, nonspouse beneficiaries will have more flexibility in their retirement and estate planning.
Offering investment advice
One of the many hot topics addressed by the PPA is that of investment advice for retirement-plan participants. The 2006 Act provided two exemptions that allowed companies to offer investment advice to participants in individually directed defined-contribution plans or IRAs with respect to their own or an affiliate’s funds or contracts, as long as various requirements are met. The requirements are intended to ensure that participants receive reliable guidance on selecting appropriate investments for their needs and goals.
Enhancing 529s
Finally, EGTRRA of 2001 included a number of provisions that made Section 529 college savings plans even more attractive, including one that allows for tax-free withdrawals for qualified expenses, such as expenses for tuition, fees, required books, supplies and equipment, and room and board if the beneficiary is enrolled in school for at least half time. EGTRRA also authorized the creation of prepaid tuition programs and rollovers from one account to the other every 12 months. All of these provisions were scheduled to expire at the end of 2010. Fortunately, PPA eliminates the sunset and makes EGTRRA’s 529 provisions permanent, making 529 plans even more appealing to your clients.
Howard Slater, CFP, CLU, ChFC, MBA, is a principal of Cedar Brook Financial Partner, LLC, a full-service, financial-planning firm in Cleveland. Securities offered through Securities America, Inc., Member NSAD/SIPC Howard Slater, Registered Representative. Advisory services offered through Securities America Advisors, Inc., Howard Slater Investment Advisor Representative. Cedar Brook Financial Partners, LLC, and Securities America are unaffiliated. You may reach Slater at hslater@cdarbrookfinancial.com.
January 2008
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