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Is the New Pension Law favorable for taxpayers and retirees?

Posted on: 04th Jan, 2007 03:32 am
Tax payers and retirees are likely to benefit from changes made to the US Pension Law (enacted on August 17, 2006). The law is expected to help people save for the future by reducing their current tax bills. Some major provisions of the new pension law are provided here.
  • 401K plan enrollment:

    Employers can automatically enroll their employees for 401K plans unlike previously when the latter planned to select the retirement plan. As a result those employees who are not willing to plan for their retirement money will have to start contributing funds into the 401k plan.

  • Higher contribution limits:

    The Internal revenue Service plans to increase the contribution levels for employee sponsored retirement plans like 401k, 403b, and IRAs. Since 2001, the limits have been raised from $2000 to $4000 this year with the amount increasing to $5000 in 2008 and further onwards as adjusted by inflation.

    The higher limits were expected to expire by 2010 but under the new law, they are likely to increase permanently. The change will encourage people to contribute more into retirement plans and also go for catch-up contributions provided they are 50 years old and above.

  • Easy rollover into Roth IRA:

    Currently, if you are leaving a job and switching over to another, you can put all the money in your former employer's 401K plan into a traditional IRA account. This is because both traditional IRA and 401K involves pre-tax contributions and tax-deferred earnings, and both require you to pay tax upon withdrawal.

    After converting your plan money into a traditional IRA, you can rollover the funds deposited into a Roth IRA. Thus, it's a two-way transfer. But the new pension law minimizes the steps in the process. Starting from 2008, you can directly convert your 401k money into a Roth IRA which allows for after-tax contributions but does not charge taxes on the funds withdrawn.

  • Tax refunds into IRA:

    The Internal Revenue Service has been sending the filer's tax refunds every year into their checking or savings accounts. But the new pension law will allow you to inform the IRS such that they deposit the refunds into your IRA. You will be given form 8888 where you can divide your refund and allocate each portion to maximum of 3 accounts.

  • Saver's Credit made permanent:

    The saver's credit is tax break offered to low income workers for putting their money into retirement account. This tax credit was expected to expire by the end of 2006. But under the new law one can still qualify for the tax break which reduces their tax bill by around $1000. The income used to determine eligibility for the Saver's Credit and the amount of tax break is adjusted to inflation each year.

    The Saver's Credit is helpful to people going for pre-tax contributions as pre-tax dollars reduce the reportable income of a taxpayer while the tax credit offers extra tax relief on their earnings.
The changes to the pension law will be implemented to ensure that more and more people get involved into retirement planning and then go for higher contribution limits.
"The Internal revenue Service plans to increase the contribution levels for employee sponsored retirement plans like 401k, 403b, and IRAs. Since 2001, the limits have been raised from $2000 to $4000 this year with the amount increasing to $5000 in 2008 and further onwards as adjusted by inflation." I like the new proposed higher contribution limits for employee sponsored plans. It will certainly encourage people to make higher contributions into their retirement plans. It will be a good move by IRS if its actual implementation occurs.

George Leweski
Posted on: 04th Jan, 2007 11:22 am
For people with low monthly income like me, the tax credit will continue, and that's great news. Many will benefit as now this tax credit provision will not expire.
Posted on: 04th Jan, 2007 02:19 pm
Yes, plenty of tax benefits for the retirees. That's a good gesture from the authorities. This will encourage people like me to invest more money for future needs.
Posted on: 05th Jan, 2007 02:03 am
The pension law has been amended on other aspects also. Some more provisions of the law are:
  • Tax free college savings:

    Tax-free withdrawal from the 529 college savings plan was expected to expire by the end of 2010. But under the Pension Protection Act, it is made permanent. So, students and parents can take out cash from the savings plan instead of withdrawing cash from the IRA and paying taxes against the withdrawal.

  • Documenting non-monetary gifts:

    Taxpayers often inflate the value of non-monetary charitable donations for getting higher tax deductions. In order to prevent this, the IRS now requires that every taxpayer to fill up a form (Form 8283)explaining in details all about the gifts. And, any gift item worth more than $500 requires an appraisal before one can apply for deduction.

  • Documenting monetary gifts:

    One should provide all required information on monetary gifts and keep with him all proofs of the donation such as receipt from the charity, bank records, cancelled checks, credit card statements etc. such records are not to be included in the tax return but they can be useful if the IRS asks for a proof.
Posted on: 09th Jan, 2007 03:35 am
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