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Pension Protection Act of 2006
-- How The New Tax Law Affects You

On August 17, 2006, President Bush signed the Pension Protection Act of 2006 into law. The Act is over 900 pages. We have highlights of some of the provisions and how they will affect you: the taxpayer, and hopefully, a retirement saver.

Now The Sun Doesn't Set

Effective immediately, the Act removes the 'sunset' provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Many of the retirement savings features of EGTRRA were scheduled to expire in 2011. Now they have become permanent. These include:

  • Higher Contribution Limits for IRA's and Employers' Qualified Plans —The Act makes permanent the expanded IRA contribution limits, expanded 401k and 403b pre-tax contribution maximums, and “catch-up” contributions for older savers. These savings incentives would have been eliminated after 2010, returning to the lower levels of $2,000 for IRAs and $10,500 for 401(k)s and 403(b)s, with no catch-up contributions available.
    While the future of Social Security is becoming less certian, it makes sense to allow Americans to save higher amounts into their retirement accounts.
  • Saver's Credit —This provision makes permanent a non-refundable tax credit for low-income workers for contributions to retirement plans.
  • Roth 401(k) and Roth 403(b) —Another creation of EGTRRA was after-tax savings opportunities with a Roth 401(k) or Roth 403(b). Some savers have hesitated to participated in these programs because it was scheduled to sunset after 2010. Roth plans have remained to be the only significat ways to build tax-free retirement savings, as opposed to tax-deferred savings.
  • Expanded Eligibility for Rollovers —Enhanced portability of rollovers among IRAs, qualified plans, 403(b) plans, and governmental 457 plans will remain in effect.
  • 529 Plans Advantages -- Imrpovements made for these popular qualified tuition programswere made permanent.

New Procedures Making It Easy For You To Save

While the act has created lots of new rules and requirements for the emplyers, for most taxpayers, who are often employees, it helps secures their retirement savings.

401(k) Automatic Enrollment — Compared to the predominant “opt-in” 401(k) plan type, studies have shown dramatic increases in plan participation by employees in “opt-out,” or “automatic enrollment” plans. With this plan type, an employer is allowed to automatically enroll eligible employees in its 401(k) plan unless an employee affirmatively elects not to participate. Why would an employer choose this option? The same reason the employer decided to have a 401(k) plan in the first place. Studies have shown that employees who participate in workplace retirmement plans stay longer, therefore reducing costs related to turnovers. For workers, this could mean an extra nudge to save toward retirement.

Investment Advice — Effective after December 31, 2006, this provision creates an ERISA prohibited transaction exemption that will enable investment advice to be provided by a “fiduciary advisor,” who would otherwise be precluded from doing so as a “party-in-interest” for a plan.

Direct Rollovers to Roth IRAs — Effective for distributions after December 31, 2007, direct rollovers of distributions from qualified plans, 403(b) plans, and governmental 457(b) plans to Roth IRAs will be allowed. Currently investors who wish to do a Roth rollover need to follow a two-step process a rollover to a traditional IRA and then a Roth conversion. The Act allows assets to be rolled directly to a Roth IRA.

Non-spouse Rollovers — Effective for distributions after December 31, 2006, non-spouse beneficiaries in a qualified plan, 403(b) or 457(b) plan are eligible to roll over to a beneficial IRA. This is great news for non-traditional families, as currently non-spouse significant others (for example, domestic partners) typically are forced to withdraw the entire amount as a lump sum and incur immediate taxes.

Direct Deposit of Tax Returns — Effective for taxable years beginning after December 31, 2006, the Act directs the Department of the Treasury to allow individuals to direct any portion of a refund to be paid directly to an IRA. In fact, taxpayers can opt to split their 2006 Federal income tax refunds with direct deposits into up to three different accounts, for example, a portin to their checking account, a portion to their IRA, and the rest to a Coverdell education savings account that they own.


According to recent economic reports from Washington, Americans' savings rate fell to a record low. Hopefully the reforms brought by the Pension Protection Act will encourage Americans to save more. Otherwise worries may lie ahead for Americans.

Article Last Updated: 09/12/2006

This material is provided for general and educational purposes only, and is not intended to provide legal, tax or investment advice. Individuals who wish to invest in retirement plans should contact their tax and financial advisors regarding their specific legal or tax situation.


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