A Brief Review Of The 2006 PPA

by Dual Income No Kids on December 2, 2006 · 0 comments

A while ago, President Bush signed the Pension Protection Act of 2006. The Pension Protection Act (PPA) has made a number of changes to America’s pension laws. If you have an IRA or are making contributions to a 401k type account, you might want to briefly read up about these changes. There are five key points.

1) Direct rollovers from retirement plans to ROTH IRAs:

According to schwabs winter investing magazine, the PPA will allow you to roll your 401k directly into a ROTH IRA. Previously you had to move it into a traditional IRA, and take the tax hit.

2) Permanently Increased Contribution Limits:

This provision is really great. The PPA raises the contribution limits for IRAs to $4,000 and the limit for 401ks to $15,000. This is really terrific because investments held in ROTHs are tax free and 401k contributions lower your taxable income. In short, these changes are about as exciting as pension reform can get.

3) Catch Up Contributions:

If you’re over 50 you can now make a catch up contribution of $1,000 to your IRA or $5,000 to your 401k. In later years these figures will be indexed to inflation. Previously, these provisions were set to expire in 2010. This is good news if you are old and you haven’t saved much.

4) Automatic Enrollment into 401ks:

The PPA has made it easier for companies to automatically enroll their employees in 401k plans. Employees may opt out if they so desire. While I’m not sure about the economics of this one, automatic enrollment has been shown to increase 401k participation, so it probably makes sense that this provision has passed.

5) Permanent Tax-Exempt Status For 529 Plans

Under previous laws, withdrawals from 529 plans would have been subject to taxation. Now withdrawals from these plans are permanently tax exempt. It also frees up some other aspects of 529 plans such as allowing once yearly tax free rollovers.

Most of this information comes from Schwab.com. If you want more details, which might be a good idea, click here. The act also has implications for same sex couples. Queercents has good posting on this.

Happy Investing!

Best,

James

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