New law not just for corporate bad guys - Changes will affect IRAs, 401(k) plans
One signature can make a big difference.
President Bush is expected to sign the Pension Protection Act into law today, authorizing sweeping changes to retirement savings and tax guidelines.
"The title makes it sound like it's only for big business," said Jerry Yeager, chief executive of SYM Financial Advisors in Indianapolis. "If you are a regular person, you don't think the law is going to apply to you, but it's going to significantly impact on your financial life."
It's true that the thrust of the law is pension-plan reform, spurred by the Enron scandal and high-profile corporate bankruptcies that left the federal Pension Benefit Guaranty Corp. stuck with company retiree bills, Yeager said.
But the nearly 1,000-page document affects more than pension plans. It affects 401(k)s, donations to charities, college savings and IRAs, too.
"It's a valiant attempt to clean up a lot of the clauses that didn't make sense in past bills," said Hubert Bromma, chief executive of Entrust Group, a retirementplan consulting service based in Oakland, Calif. "Now, people can plan for their financial future with a lot more confidence."
Under the new law:
-- Americans can use direct deposit to put tax refunds into up to three accounts, including their IRAs.
-- Companies can automatically enroll employees in 401(k) plans, and automatically increase an employee's contribution over time, to up to 6 percent of salary. Employees will be able to opt out of the programs.
-- Participants in employer 401(k) plans will have access to professional investment advice. In most cases, employers will bring in independent financial advisers to meet with employees.
-- The Saver's Credit, which provides up to a $1,000 tax credit to low-income earners who contribute to retirement accounts, is now permanent. It would have expired at the end of the year.
-- Annual IRA contribution limits will remain at $4,000 until 2007, increase to $5,000 in 2008 and then be adjusted for inflation every year thereafter. Under the old law, contributions would have been reduced to $2,000 in 2010.
-- The Roth 401(k) will become a permanent retirement-account option. Employers have been reluctant to adopt the new plan, which allows workers to save after-tax dollars for retirement through payroll deduction, because it would have been eliminated in 2010.
-- Annual 401(k) contribution limits will stay at $15,000. They were scheduled to fall to $13,000 in 2011.
-- Withdrawals from 529 college savings plans used for qualified highereducation expenses will remain taxfree, instead of becoming taxable in 2010.
-- Nonspouse beneficiaries of retirement accounts now will be able to roll the money directly into their own IRA without paying penalties or taxes.
-- Those 62 or older will be allowed to withdraw money from their retirement accounts while they are still working.
-- Retirees can transfer up to $100,000 to charity directly from their IRA accounts, without paying income tax. Under the old law, the money had to be moved to the retiree's personal account, was taxed as income, and then donated.
-- People donating goods to charity won't get a deduction unless the items are in "good condition or better." The definition of "good condition" is to be determined.
Also, workers with pensions might be able to rest a little easier at night, thanks to sweeping reforms to funding rules.
Companies now have seven years from today to fully fund their pension obligations, and they won't be allowed to offer more benefits to employees if their plans are under-funded. Executives of companies with failed plans also might lose their generous compensation plans.
"It's positive," said Mark Thresher, president and chief operating officer of Nationwide Financial Services. "It's put provisions permanently in place that give employers and employees the tools they need to save more for retirement."
