The Pension Protection Act (PPA) of 2006 can seem like a maze of confusing laws. In reality, this law has many practical aspects that retirees and those still dreaming of retirement should be aware of. If taken advantage of, this law provides several avenues for individuals to maximize their retirement security and the power of the dollar.
This law may have a dramatic impact on our society, encouraging the type of giving that Warren Buffet seems to have kicked off with his large contribution to the Bill and Melinda Gates Foundation. In the next twenty years, this country is going to see a dramatic shift in wealth and laws such as this may create an impact on where that wealth flows.
CHARITABLE CONTRIBUTIONS
President Bush has given American retirees a gift this year, in the form of the PPA, providing tax benefits for those that wish to use their assets to contribute to nonprofit organizations.
In 2006 and 2007, donors over the age of 70 may donate up to $100,000 directly from an IRA to the charities of their choice. This contribution will not be taxed as an IRA withdrawal. In other words, the money will be distributed directly to the charity, without being withdrawn or taxed. This provides an extra incentive to donate, by making the process smooth and simple. And through this process, the full amount of the donation is received by the charity, tax free. This law is currently effective for 2006 and 2007.
The PPA provides those with larger IRAs and other assets the opportunity to preserve the total sum of withdrawals (up to $100,000) for charitable purposes. Before this law and in all other situations, that money is diminished by federal and state taxes.
The distributions made directly to charities under the PPA count toward the mandatory IRA withdrawal amount. While these mandatory withdrawal amounts are not changing, individuals who have more assets than they need may choose to withdraw their money for charitable purposes.
Those wishing to avoid taxes on these distributions may choose to give to charity instead. Of course, this could provide a large benefit to nonprofit organizations, who may receive a large infusion of cash throughout the next two tax years. After that, Congress will have to decide whether to extend these benefits into the future.
DISTRIBUTIONS
Effective this year, the PPA permits all retirement plans to begin making distributions to persons at the age of 62, even if they are still employed. This incentive allows individuals more financial options. More and more individuals choose to work later than an expected retirement age. However, many work at reduced hours or salary so that they may have free time. For that and various other reasons, individuals may wish to begin making withdrawals from a retirement account while they are still working. The PPA now makes that possible.
AUTOMATIC ENROLLMENT IN 401k
The PPA allows employers to automatically enroll employees in their 401k plan. Based on research establishing that those automatically enrolled tend to continue to take advantage of those benefits, Congress has determined that employers be allowed to automatically enroll their employees. If an employee wants to discontinue contributions to the plan, they may choose to do so.
There was also research establishing that many employees do not choose to take advantage of plans they are offered at work if they have to enroll themselves. This is true even when the company offers a match on the employee contributions. This law may help to build overall retirement savings among Americans.
CATCH-UP MADE PERMANENT
The Pension Protection Act has made permanent the ability of individuals 50 or older to make catch-up contributions to Individual Retirement Accounts. Similarly to the automatic enrollment in 401k plans, this provision is designed to build overall savings of Americans for retirement.
HEALTH CARE FLEXIBLE SPENDING ACCOUNTS
Flexible spending accounts are offered by many employers, allowing employees to pay healthcare expenses such as deductibles, co-pays and other not reimbursed expenses, with pre-tax dollars. Before the PPA, flexible spending accounts had to be used entirely by the end of the year or that money would be lost to the taxpayer. This was known as the use-it-or-lose it’ account. Most individuals either avoided the account entirely or enrolled, but contributed very conservative amounts to avoid contributing an amount exceeding qualified healthcare costs.
The PPA now provides for a $500.00 rollover of unused contributions to flexible spending accounts. With this protection, individuals can maximize their savings on healthcare by contributing to a flexible spending account without fear of losing the money they put into that account.
TAX RETURN DISTRIBUTIONS
In another effort to ensure financially secure retirement for Americans, the government will now offer direct deposit of tax refunds into an Individual Retirement Account in that individual’s name. This option may be selected when filing the tax return, if a refund is due.