News & Articles

"Gifts From Uncle Sam"

October 01, 2006

by R. Patricia Grenier, CFP®, CSA

Thank-you Uncle Sam.  It is not often we can genuinely thank "Uncle Sam".

On August 17, 2006, President Bush signed the Pension Protection ACT.  This ACT implemented major reform not only to the defined benefit pension system, but also contains several significant provisions beneficial to the defined contribution retirement plan and to IRA plans.

For those who need a refresher course, defined benefit plans were very popular at one time.  As the name implies, participants can count on a specific income stream for life at retirement.  These plans are strictly employer contributory.  A deferred contribution plan, on the other hand, defines or sets a maximum limit on the amount that can be contributed by both the employer and employee.

I would like to highlight some of the provisions that will impact us more often:         

EFFECTIVE IMMEDIATELY, the "Sunset Provisions" of the Economic Growth and Tax Relief Reconciliation Act of 2001, (EGTRRA), are removed.  Many of the retirement saving provision of EGTRRA were scheduled to expire in 2011.  These include:

• Increased Retirement and Savings Incentives - The expanded IRA contribution limits of $4,000 this year and next; $5,000 in 2008; $15,000 pre-tax contribution limits for 401(K) and 403(b), along with the $1,000 IRA and the $5,000 qualified plan "catch-up" contribution for workers 50 years old or older was made permanent.^{1, 2}
•  Savers Credit - Low-income workers can permanently count on a non-refundable tax-credit for contributions to a retirement account.³
•  ROTH 401(k) and ROTH 403(b) - The after-tax savings opportunities of these plans will not expire after 2010.⁴ Imagine being able to save money year after year and to be able to make withdrawals of principal and growth without having to pay any taxes on it!!  Also, imagine not having to withdraw the money at any age and to pass it along to heirs without the heirs required to pay taxes on it when withdrawn.

A recent survey conducted by the Employee Benefit Research Institution, found that ONLY 7 out of 10 workers are saving for retirement.  More astonishing is the finding that more than half of those workers saving for retirement report total savings and investments of less than $50,000.⁵  Certainly not enough to retire on!! 

That soon will change, effective for plan years beginning after December 31, 2007, employers will automatically enroll eligible employees or participants.  Employees not wishing to contribute will have to "opt-out".

Three additional changes will take place effective after December 31, 2006:

• The new bill allows for workers to receive investment advice regarding their various company-sponsored options. However, the investment advisor(s) and investment manager(s) must meet certain exemption qualifications.⁶
  
• A major provision of the ACT is that it will permit non-spouse beneficiaries to do a direct Trustee-to-Trustee transfer of the inherited retirement plan into a properly titled beneficial IRA. In the past, the non-spouse beneficiary had to withdraw the monies within a maximum period of 5 years and pay the taxes on the entire amount. Now, non-spouse beneficiaries can spread the distributions over their life expectancy and spread the tax liability over many years.

This new rule creates many estate and tax planning benefits.  Same sex partners, children, grandchildren, and other non-spouse beneficiaries can now enjoy the same planning benefits that only spouses were able to.  This single provision is by far the biggest and best part of the new law. ^{7, 8}

• Another provision is that individuals will now be able to direct the Department of Treasury to directly deposit any portion of their tax refund into an IRA making IRA contributions easier. ⁹   

Beginning in 2008, individuals will be able to directly roll their qualified plans, 403(b) or Governmental 457 Plan into a ROTH IRA to avoid having to first place the assets in a conduit IRA.¹⁰

Another big "thank-you" is owed to Congress for a provision signed into law by President Bush on May 17, 2006.  This provision eliminates the eligibility rules for ROTH IRA's.  But, this provision is not effective until 2010.

Under the current rule, taxpayers with Modified Adjusted Gross Income (MAGI) over $100,000 or who had a tax filing status of married filling separate were not eligible to convert to a ROTH IRA.  In addition, if converted, the conversion income would be taxed in the year of the conversion.  That will also change for 2010.

For conversions done in 2010, the taxes can be spread evenly over 2 years and included in income for 2011 and 2012!!  This is like getting an interest free loan to build a tax-free savings account.¹¹

The reality is that Congress is sending us a message.  The message is loud and clear.  The responsibility for our retirement security falls squarely on ourselves.  The only thing Congress can do to help is to make it easier for us to contribute more, keep it longer with new, more flexible and liberal retirement plan provisions.  This is what they have done.

The information presented is general in nature and should not be considered legal or tax advice.  You should consult your legal or tax advisor for information concerning your own specific tax situation.

¹ www.Oppenheimerfunds.com/J2cc/www/targeted copy/advisorpage/article/list_08-25-06

² Big Changes for your 401(K), retirement - MSN Money

³  www.Oppenheimerfunds.com/J2cc/www/targeted copy/advisorpage/article/list_08-25-06

⁴  www.Oppenheimerfunds.com/J2cc/www/targeted copy/advisorpage/article/list_08-25-06

⁵  Significant Summaries Society of Senior Advisors Volume 6, Issue 3, page3

⁶  Big Changes for your 401(K), retirement - MSN Money

⁷  "New Law Eases Taxes On Inherited 401(K)s WSJ, August 23,2006

⁸  Ed Slott's IRA Advisor - "The Protection Act of 2006 New IRA and Plan Provisions", September 2006, pages 2-3

⁹  www.Oppenheimerfunds.com/J2cc/www/targeted copy/advisorpage/article/list_08-25-06

¹⁰ www.Oppenheimerfunds.com/J2cc/www/targeted copy/advisorpage/article/list_08-25-06

¹¹  Ed Slott's IRA Advisor, "New Tax Eliminates Eligibility Rules for ROTH IRA Conversion, August 2006, pages 2-3

Pat Grenier is a General Partner with BRP/Grenier Financial Services in Springfield, MA. Securities offered through Cadaret, Grant and Co., Inc., Member FINRA/SIPC. BRP/Grenier and Cadaret, Grant and Co., Inc. are separate entities.

Pat can be contacted by phone at (413) 736-6712, or email her at pat@brpgrenier.com

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