The Pension Protection Act of 2006, signed by President Bush on August 17, revised the funding rules for pension plans. It is hoped that requiring most company pension plans to be fully funded within a seven-year period will lessen the need for taxpayer-funded bailouts of failed plans. Tucked away in the 900-plus page law are a number of tax law changes. Here’s a quick summary highlighting the changes.
The higher contribution limits for IRAs, SEPs, SIMPLEs, 40l(k)s, and 457 plans, set by the 2001 Tax Act, were scheduled to expire after 2010. The pension law makes the higher limits permanent, including the additional contributions permitted for those aged 50 and older. Roth 40l(k)s, also previously scheduled to expire, are made permanent.
The “saver’s credit” of up to $1,000 available to lower-income taxpayers who contribute to a retirement account is made permanent, and the income thresholds for eligibility will be adjusted for inflation after 2006.
The $500 retirement plan start-up credit for small businesses is made permanent. The credit is for plan expenses in the first three years.
Nonspouse beneficiaries (e.g., children, siblings, significant others) of a decedent’s retirement account will be able to roll over the account into an IRA, an option formerly permitted only for spouses of a decedent.
The favorable tax treatment allowed for Section 529 plans (college accounts) is made permanent; withdrawals used for qualifying higher education expenses will continue to be tax-free.
Military reservists called to active duty and public safety employees (such as policemen and firemen) will be able to take penalty-free early withdrawals from retirement plans if certain requirements are met.
Rules for deducting charitable donations are tightened. Cash donations, even those under the previous $250 threshold, will have to be substantiated by a bank record or written documentation from the charity. Donations of
used clothing or household goods will be tax deductible only if they are in “good” condition.
David Compton is a Certified Public Accountant with offices in Meridian and Birmingham, Ala.
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COMPTON:900-page pension law includes tax changes
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