| 10 tax law changes in new pension law |
| By Kay Bell • Bankrate.com |
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It took federal lawmakers almost two years of debate, half a dozen stabs at earlier legislation and an end-of-session deadline to finally agree on a law designed to shore up company pension plans.
But buried in the 900-plus pages of the Pension Protection
Act of 2006 are several tax provisions that will benefit individuals
who do their own golden years' saving.
The law
also contains welcome news for folks looking
for ways to cover the high cost of college. The philanthropic, however,
face some new, good and not-so-good donation guidelines.
| The new pension law primarily
makes changes to retirement plans, on both corporate and
individual levels. |
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| But several provisions also
provide tax breaks for, and call more tax examiner attention
to, other areas that affect individual taxpayers. |
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| The 10 new tax provisions |
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Defined-contribution plans get a lot of attention
in the new pension law. These are company-sponsored retirement
plans such as 401(k)s, which help you save for tomorrow
while simultaneously reducing today's tax bill.
These retirement plans require employees to take an active part in saving for their post-work years. That, say financial experts, poses a couple of challenges.
Many workers invest their 401(k)
money too cautiously or worse, they don't put any money at all into
the plan. The new pension law will change that.
1. Sign right
up, automatically
"Historically, with 401(k) plans, you affirmatively elected
in," says Mark Luscombe, principal tax analyst at CCH, a tax
publisher and software provider. "Now companies will be permitted
to assume you're in unless you choose otherwise."
Workers who are "kind of lazy about doing anything for retirement" could find this a good move, says Bob D. Scharin, senior tax analyst with RIA, a Thomson business and provider of tax information and software to tax professionals.
But will it work?
"Whether it will actually increase participation, we'll have to wait and see," says Luscombe. "Some workers, when they see a cut in their paycheck, might barge in and elect out."
Some companies are already automatically enrolling employees in savings plans, but the new law clarifies the situation. It offers employers additional guidance and makes it easier for companies to institute the system beginning in 2008.
While such a system might mean more work for a business, Luscombe says some companies might choose that method because it could provide benefits for upper-level employees.
To prevent company plans from disproportionately benefiting
higher-income workers, federal nondiscrimination rules require that
companies make sure their plans represent all employee levels.
"When there's greater plan participation by workers in the lower pay ranges, employees with larger salaries are allowed to also contribute more," says Luscombe.
2. Investment
advice
When companies automatically enroll employees in 401(k)s,
expect the default plan to be one that doesn't pose too big a risk.
Such plans, however, also tend to offer lower, and slower growing,
returns.
Many workers, when given a choice, already pick "safer" 401(k) options. For some, that's a wise move. But it's not right for all.
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