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  • Tax Increase Prevention & Reconciliation Act of 2005 and 401k Retirement Plans
  • What Happens to your 401k when you are Divorced?
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  • Become a Millionaire with your 401k Plan
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    Pension Protection Act of 2006 v/s Economic Growth and Tax Relief Reconciliation Act of 2001

    The Pension Protection Act of 2006 became law on August 17th, 2006 and is the biggest pension and retirement reform brought about since the Employee Retirement Income Security Act of 1974 (ERISA). Apart from affecting Pension Plans, the Pension Protection Act of 2006 has various effects on Individual Retirement Account (IRAs) as well as Defined Contribution Plans.

    The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) allowed for various reforms such as increasing the annual IRA and pension plan contribution limits, making small business 401k and pension plans easy to setup and maintain as well as added tax benefits. However, these reforms were only temporary, to last till the year 2011. However, with the Pension Protection Act of 2006, these reforms are now permanent. Here are some of the reforms brought about by the Pension Protection Act of 2006:

    • Increase in IRA contribution limits from the static $2000 to $3000 in the year 2002, $5000 in the year 2008 and the potential of annual increments based on inflation and increase in cost of living.
    • Allowance of retirement savers to make IRA Catch Up contributions commencing from $500 in 2002, to $2000 in the year 2006. Before the Economic Growth and Tax Relief Reconciliation Act of 2001, there was no such thing as IRA catch up contributions.
      Note: Catch Up Contributions are only available for people over the age of 50.
    • Catch Up contributions available to 401k, 403b plans and Salary Deferral SEPs are at $1000 in 2002 and $5000 in 2006 (thus increasing at a rate of $1000 per year).
    • Easy movement of assets between traditional IRAs, qualified 403b plans, and 457 plans.
    • Allowance of Roth IRA contributions where high income personnel can make AFTER-tax contributions, as opposed to the usual pre-tax 401k contributions. Learn more about pre-tax and after-tax 401k contributions here.
    • Allows the increase of deduction limits for SEP IRAs and profit-sharing plans from 15% of employee's Gross Wage or compensation to 25%.

    Introduction of Saver's Credit: Tax Credit for Low Income & Middle Income Consumers

    If you fall in the category of low income savers, you may be eligible for a tax credit of $1000 on contributions made to 401k retirement plans, 403b plans, 457 government plans, IRA (Individual Retirement Account) or Roth IRA. This new legislation called the "Saver's Credit" went into effect in 2002 (thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001) and is a reduction to your Gross Income (so that you have a less taxable income). It cannot be used as a $1000 refund for extra cash flow... (Read Full Article)

    Allowance of Direct Conversions from Qualified Plans to Roth IRAs

    Before the introduction of the Pension Protection Act of 2006, any assets from 457 or 403b plans must first be converted to a Traditional IRA before being eligible to be moved into the Roth IRA. Under the PPA of 2006, these assets can easily be converted from 457 or 403b plans to Roth IRA assets starting from 2008.
    Note: The Individual's Adjusted Gross Income under this case must be $100,000 or less.

    Extra Contributions Applicable to Employees of Bankrupt Employers

    Starting December 31, 2006, and before January 1, 2010, employees of bankrupt employers are allowed to make additional IRA contributions of upto $3000 per year from 2006 to 2009. In order to be eligible for this provision, the employee must meet the following requirements:

    • Employee must have been a participant in a 401k plan in which 50% of the contributions were matched by the Employer. In addition, these match up salary deferral contributions must be made via issuance of company stock options.
    • Preceding the year in which the extra contribution is made, the employer must have been under a bankruptcy case.
    • The employee must have been a participant in a 401k plan for atleast 6 months before the bankruptcy application was filed by employer.
     

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